* Euro zone, UK service sectors surge in March
* US service sector slips from five-year high
* China hikes rates, ECB expected to follow suit
* India services PMI slips slightly from 7-month high
By Andy Bruce and Kristina Cooke
LONDON/NEW YORK, April 5 (Reuters) - Service industries powered ahead in Britain and the euro zone in March but slowed in the United States, surveys showed on Tuesday, highlighting the different challenges faced by policymakers.
The U.S. Institute for Supply Management's index of non-manufacturing activity slipped to 57.3 in March from February's five-year high of 59.7, falling short of market expectations.
"We're looking at this as a pause," said Paul Radeke, vice president at KDV Wealth Management. A number of U.S. economists have recently trimmed their first-quarter growth estimates.
Purchasing managers indexes (PMIs) in Britain and the euro zone told a different story, suggesting economic growth in the first quarter could surpass economists' expectations.
PMIs measure business activity at thousands of companies,
The British services PMI jumped unexpectedly in March to its highest level in over a year. The equivalent euro zone survey showed service sector companies enjoying their fastest upturn since August 2007.
The British and European surveys showed prices paid by companies for raw materials and goods soared again in March. They also revealed a yawning gap between input and output prices as businesses felt unable to pass on soaring costs to consumers already facing austerity measures.
"The difference between the input price and output prices does imply that margins are getting squeezed," said Philip Shaw, chief economist at Investec.
Countries like China and India have been battling high inflation for the past two years. The People's Bank of China raised its deposit and lending rates by 25 basis points on Tuesday, for the fourth time since October, in an ongoing battle to rein in inflation.
The European Central Bank is tipped to follow suit and raise interest rates by a quarter percentage point from a record low 1.0 percent on Thursday. It would be the first among the world's big four central banks -- the U.S. Federal Reserve, the Bank of Japan, the ECB and Bank of England -- to begin raising benchmark interest rates.
By contrast, on Monday, Fed chairman Ben Bernanke signaled the U.S. central bank is in no hurry to reverse course.
Bernanke said a recent increase in U.S. inflation is likely to be transitory, suggesting he is committed to completing a $600 billion stimulus program scheduled to end in June.
Cost pressures in the U.S. dipped slightly in March, according to the ISM services report's prices component which slowed to 72.1 from 73.3 in March. The employment component slowed to 53.7 from 55.6.
BRITISH SURGE
In Britain, the Markit/CIPS services PMI surged to a 13-month high of 57.1 in March from 52.6 in February, beating even the most optimistic forecast and remaining comfortably above the 50 mark that divides growth from contraction.
"It's extraordinarily strong, and it's puzzling. In some ways you can argue that maybe last month's print was on the soft side, though it was in line with the autumn," said Ross Walker, economist at RBS.
Survey compiler Markit said the data pointed to a 0.8 percent quarterly expansion for the economy as a whole in the first three months of 2011, compared with the latest consensus expectations for 0.7 percent. [ECILT/GB] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Click here for a graphic comparing the UK PMI with GDP: http://r.reuters.com/wah88r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Sterling hit its strongest rate against the U.S. dollar in two weeks on Tuesday, while gilt futures and stocks fell after the PMI data renewed expectations of an interest rate hike. Markets are pricing in a move by the BoE next month. [ID:nLDE7340IN]
The euro zone services PMI rose from 56.8 in February to 57.2, its best showing in almost four years and the input price component leapt above 60 for the first time since the oil price boom of 2008. Brent crude oil is trading at just over $120 a barrel, near a 2-1/2 year high.
While there are few signs in Europe of higher food and energy costs fueling broader inflation, the Indian PMI showed booming wage costs driving input prices there much higher.
The HSBC Indian PMI slipped to 58.8 in March from a seven-month high of 60.2 in February, showing a fast-growing services sector struggling to keep up with rampant inflation. [ID:nBMA009650]
The official Chinese non-manufacturing PMI on Monday showed growth of input prices slowed in March for the fourth month running as headline index hit a five-month high of 60.2, up from 44.1 in February. [ID:nL3E7F41ER] (Editing by Mike Peacock)