* Euro zone and UK service sectors surge in March, PMIs show
* Inflation pressures still strong, could squeeze profits
* China hikes rates, ECB expected to follow suit on Thursday
* India services PMI slips slightly from 7-month high
By Andy Bruce
LONDON, April 5 (Reuters) - Service sector businesses in Britain and the euro zone powered ahead in March, with inflation squeezing company margins before an expected euro zone interest rate rise this week, business surveys showed.
The European Central Bank is tipped to raise rates on Thursday by a quarter point from a record low 1.0 percent. 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.
Tuesday's purchasing managers indexes (PMIs), which measure business activity at thousands of companies, suggested economic growth in the first quarter could surpass economists' expectations for both the euro zone and Britain.
The UK services PMI jumped unexpectedly in March to its highest level in over a year, while the equivalent euro zone survey showed service sector companies enjoying their fastest upturn since August 2007.
"The evidence on the euro zone side has been a bit more consistent (than the UK's), but what the headline figures don't show is the extent of the diversity between the countries in the euro zone," said Philip Shaw, chief economist at Investec.
France and Germany again pushed the euro zone services PMI higher, but growth in Ireland slowed and Spain resumed a long-term trend of contraction among its services firms.
The comparable U.S. non-manufacturing ISM survey, due at 1400 GMT, is expected to slip marginally to 59.5 in March from a five-year high of 59.7.
The surveys showed prices paid by companies for raw materials and good soared again in March but a yawning gap opened between input and output prices, with neither euro zone nor British businesses feeling they could pass on soaring costs to consumers already under a pall of austerity measures.
"The difference between the input price and output prices does imply that margins are getting squeezed," said Shaw.
The problem of high inflation is something companies in emerging markets like India and China have battled for the last two years -- underlined by the latest policy move from the Chinese central bank.
If the ECB follows suit on Thursday, it will become the first among the big four central banks -- it plus the U.S. Federal Reserve, the Bank of Japan and Bank of England -- to begin raising rates.
For some sectors, rising costs have already taken their toll. Sales at euro zone retailers, an area not included in Tuesday's PMI data, fell unexpectedly in February by 0.1 percent, figures from the European Union showed.
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 keeping 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.
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Click here for a graphic comparing the UK PMI with GDP:
http://r.reuters.com/wah88r
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Sterling hit its strongest rate against the 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.
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 few signs have emerged that feared second-round inflation effects are taking hold in Europe so far, 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.
"Inflation remains the dominant concern, not growth, calling for the Reserve Bank of India to continue the tightening cycle," said Leif Eskesen, chief economist for India & ASEAN at HSBC.
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. (Editing by Mike Peacock)