By Jonathan Cable
LONDON, April 3 (Reuters) - The euro zone's dominant service sector contracted sharply again in March, but not as rapidly as in February, offering some hope that the most severe leg of the downturn may have passed, a survey showed on Friday.
The Markit Eurozone Purchasing Managers' Index for the service sector was revised up to 40.9 in March from the 40.1 flash estimate and well above February's 39.2. It was also higher than the 40.1 predicted by economists. The index remained solidly below the 50.0 mark that divides growth from contraction but was lifted by an upturn in the constituent data, with rises in indexes from the big four economies of Germany, France, Spain and Italy.
Services business expectations also jumped sharply to a six-month high of 48.6 in March from the 47.5 flash reading and up from 46.1 in February. That was the highest reading since September, when the financial crisis began to intensify.
"With the rate of decline easing in the final month of Q1, and confidence improving to the highest since Lehman's collapse, there are signs that we may be over the worst," said Chris Williamson at data provider Markit.
Financial markets also have got a whiff of recovery, with European stock markets rallying sharply along with world shares over the past few weeks.
The Composite Index, combining services and manufacturing activity, moved up to 38.3, ahead of February's 36.2 and considerably ahead of the 37.6 expected and flash estimate.
But the survey compilers stressed that the absolute levels are still very low and that overall, the data suggest that the start of 2009 may prove to be as bad as the 1.5 percent contraction in the final quarter of 2008.
"Despite the upturn in the final PMI output numbers for March, the survey indicates that the combined output of the manufacturing and service sectors suffered the largest fall in the survey's near 11-year history in Q1," Williamson said.
Firms across the 16-member euro area continued to slash jobs in an effort to cut costs, driving the Composite employment index to a new low of 40.3, down from February's 40.8.
German automotive cable and wiring supplier Leoni announced plans to shed 4,000 workers while Heidelberg, the world's largest printing press maker, said it was losing 2,500 employees.
At the same time, price pressures eased in March at a record pace in the history of the survey, both for inputs and those charged by companies for services.
Annual inflation in the euro zone fell to 0.6 percent in March, far below the ECB's preferred ceiling of 2.0 percent.
The European Central Bank cut interest rates by just 25 basis points on Thursday, less than the half-point economists and financial markets expected but is seen cutting by another 25 basis points to 1.0 percent at its May meeting. (Editing by Toby Chopra)