The euro zone's private sector contracted this month for the first time in two years as the escalating sovereign debt crisis and turmoil in global markets stymied growth, business surveys showed today.

The surveys point to economic stagnation in the current quarter and suggest the crisis that started in Greece, spread to Ireland and Portugal and now threatens Italy and Spain is finally taking its toll on confidence and growth.

"The recovery has finished, we are now contracting. The forward-looking indicators suggest that things will deteriorate further in the coming months," said Chris Williamson, chief economist at survey compiler Markit.

"It's not just the periphery problems spilling over to the core. There is a wider malaise in the global economy which is hurting."

The Flash Markit Eurozone Services Purchasing Managers' Index (PMI), which measures business activity at thousands of firms from banks to restaurants, sank to 49.1 this month from August's 51.5, far below the Reuters consensus of 51.0.

None of the 37 economists polled had predicted that services activity would contract.

This is the first time the index has been below the 50 mark that divides growth from contraction since August 2009.

It was a similar picture in the manufacturing sector, which had driven a large part of the bloc's recovery. Its index dropped to its lowest level in two years, 48.4, slightly worse than expectations for a fall to 48.5.

Factory output contracted for the second month running. New orders contracted for the fourth month, and at the fastest since May 2009. The index sank to 44.8 from 46.0 in August.

"There is clearly weakness in domestic and export markets so it is a broadbased deterioration we are seeing. In both sectors we suspect things will deteriorate in the fourth quarter," Williamson said.

The flash composite PMI, which combines the services and manufacturing data and is often used as a guide to growth, fell to 49.2, its first sub-50 reading since July 2009, from 50.7 in August. That was also below the Reuters consensus of 50.0.

Markit said the figures were consistent with no growth this quarter. A Reuters poll taken earlier this month predicted third quarter growth of 0.2 percent, already very weak.

Earlier data from Germany, Europe's largest economy, showed its service sector slipped perilously close to contraction while manufacturing, which was booming earlier this year, flatlined.

In neighbouring France, services business activity grew at its weakest pace in two years while its manufacturing sector contracted for the second consecutive month.

The European Central Bank was the first of the "big four" central banks, a club that includes the U.S. Federal Reserve, the Bank of England and the Bank of Japan, to raise interest rates since the global financial crisis.

It has raised rates by 25 basis points twice this year. But most economists don't see any further hikes until 2013 at the earliest, and some are now calling for a cut.

The ECB tightened policy to control inflation that was running well above its 2.0 per cent target ceiling. But the PMI figures suggest price rises are already coming under control.

The composite index for prices companies charge fell to 49.8, its lowest since July 2010, while input prices rises slowed.

"There was a huge easing in price pressures, particularly in manufacturing. It should give some comfort to policymakers thinking about perhaps reversing some of those rate hikes we saw earlier this year," Williamson said.

The International Monetary Fund said on Tuesday the ECB will need to ease monetary policy if economic conditions continue to deteriorate and the survey suggests they will.

The new business index for the service sector fell to 48.3 from 51.4 in August, the first contraction in over two years, while the backlogs of work index showed that for the third month some of the activity was driven by firms running down old orders.

But despite the downturn firms still took on new workers, albeit at a slower pace than in August, and official data released late last month showed unemployment held steady at 10.0 per cent in July, unchanged from June levels.

Reuters