UK service sector activity falls for 1st time in 2 yrs in Dec -PMI

LONDON, Jan 4 (Reuters) - Britain's services sector shrank for the first time in two years in December, data showed on Friday, suggesting the economy as a whole slipped back into contraction in the last three months of 2012.

The Markit/CIPS services Purchasing Managers' Index (PMI) dropped to 48.9 in December - its lowest reading since April 2009 - from 50.2 in November, confounding economists' forecasts for a small rise.

Markit said the figures, combined with mixed manufacturing and construction figures earlier this week, suggest Britain's economy shrank 0.2 percent in the final quarter of 2012, a slightly bigger drop than most other private-sector forecasts.

"The first fall in service sector activity for two years raises the likelihood that the UK economy is sliding back into recession," said Chris Williamson, chief economist at survey compilers Markit.

The figures dash hopes raised by a recent more upbeat manufacturing survey and solid official services data for October that Britain might avoid a fourth-quarter contraction.

A fresh fall in GDP, just three months after Britain emerged from its second recession since the financial crisis, would be a blow for finance minister George Osborne. It would also raise the chance of the Bank of England restarting its stimulus programme - something most analysts currently doubt.

It is the first time the services sector index has fallen below the 50 mark that separates growth from contraction since December 2010, when unusually heavy snow disrupted business.

Although December 2012 was very wet, weather disruption was less widespread than two years earlier, and Markit said underlying weakness meant a rapid rebound looked unlikely.

"Bad weather is likely to have played a role in dampening service sector activity in December, but the fact that incoming new business dropped for a second successive month suggests that underlying demand remains very weak and that activity may continue to fall in the New Year," Williamson said.

The services sector new business index dropped to 49.4 from 49.6, hitting its lowest level since December 2010.

The composite PMI, which combines surveys for the services, manufacturing and construction industry, fell to 49.9 from November's 50.1. Averaged over the fourth quarter as a whole, Markit said that the composite PMI was at its lowest level in three-and-a-half years.

Within the services survey, which does not cover the public sector or retailers but does look at transport and communication, financial and business services, computing, hotels and restaurants, employment fell and the rate of price increases slowed.

"Market conditions were subdued, with client budgets being tightened towards the end of the year. There was evidence that clients were holding back from committing expenditure, preferring instead to focus on cost control at a time of ongoing economic uncertainty," Markit said.

Economists polled by Reuters expect Britain's economy to grow by 1.1 percent in 2013 after contracting 0.1 percent in 2012. (Editing by Hugh Lawson)