By Andy Bruce and Anooja Debnath
Shrinking order books and plummeting confidence sent euro zone factories into contraction for the third month in a row, and service sector companies for a second month.
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The Flash Markit Eurozone Services Purchasing Managers' Index (PMI), which measures business activity at thousands of firms from banks to restaurants, sank to 47.2 this month from September's 48.8, well below a Reuters consensus of 48.5.
In fact, none of the 35 economists polled by Reuters thought this preliminary reading of the services index would fall so far below the 50 mark that divides growth and contraction.
"Most indicators seem to suggest it is going to get worse not better in the coming months. So there is a significant chance of a contraction in the fourth quarter," said Chris Williamson, chief economist at survey compiler Markit.
He said the current level of the indexes, which have a good record of tracking economic growth, could signal a quarterly rate of decline approaching half a percentage point.
The services new business sub-index fell to 46.2 in October from 47.1 in September, its lowest reading since July 2009 when the euro zone was still escaping the worst recession since World War II.
A Reuters poll conducted earlier this month showed a 40 percent chance the euro zone will slip back into recession, while economists now expect the European Central Bank to reverse some of its monetary policy tightening later this year.
German manufacturing contracted this month for the first time in two years, according to individual country PMIs released earlier on Monday. The service sector rebounded unexpectedly but that was perhaps the only bright spot among this month's surveys.
The euro zone's manufacturing PMI slipped to 47.3 in October from 48.5 last month, its lowest point since July 2009. The output index, which feeds into the broader composite survey that combines manufacturing and services, fell to 47.2 from 49.6 in September.
Like the service sector survey, manufacturers reported a steep fall in new business, with the index for that slipping to 43.7 from 45.2 the previous month -- its lowest reading since May 2009.
"There is little to see what will cause an improvement for the first quarter (next year) unless European leaders in the next few weeks manage to bring out a convincing package to restore confidence," said Markit's Williamson.
The composite PMI, a broader measure of private sector activity, also fell sharply, from 49.1 in September to 47.2 this month. Its employment index fell to 50.3 from 51.0, showing an effectively stagnant labor market. Worryingly, Markit suggested worse is on its way for euro zone workers.
Williamson pointed to this month's backlog of work index, which fell to its lowest level since August 2009, and tends to lead the employment index.
"We can expect to see some disappointing news on the labor market front and that is going to further hit consumer confidence."
(To see a program on the euro zone PMI on Reuters Insider Television, click on http://link.reuters.com/jaf64s)
(Editing by Susan Fenton)