LONDON, Sept 3: Britain's dominant services sector shrank in August for the fourth straight month, a survey showed on Wednesday, although signs of weakness were much less pronounced than expected.

The Chartered Institute of Purchasing and Supply/Markit purchasing managers' index for services companies unexpectedly picked up to 49.2 last month from 47.4 in July, suggesting the sector, spanning cafes to telecoms, hardly shrank at all.

Analysts had expected a further deterioration to 47.0.

Even so, the index for the sector that makes up about three-quarters of the economy has held below the 50 level marking the divide between contraction and growth since May.

“While there is some encouragement that the surveys have not weakened further this month, we still think it likely that the economy will contract in the second half of this year before recording negative growth in 2009 overall,” said Jonathan Loynes, an economist at Capital Economics.

“Note too that the services report does not include the retail sector, which other surveys suggest is now suffering very heavily indeed.”

Sterling rose immediately after the data against the dollar and euro as the better-than-expected figures gave investors an excuse to buy back the currency after it was driven to fresh multi-year lows earlier in the session.

The pound has been hurt by intensifying concerns about the state of the British economy and expectations that interest rates will have to fall soon to stave off a prolonged slump.

The services PMI did little to alter those expectations, especially as the report showed a cooling in price pressures, but the headline index has been improving since hitting 47.1 in June -- its lowest since October 2001.

The Bank of England is expected to hold rates at five per cent on Thursday, with most policymakers wary of loosening monetary policy until inflation has peaked even though the economy ran out of steam in the second quarter.

New orders fell for a fourth straight month but the index reading posted its first improvement since February, up to 47.1 from a series low of 44.7 in July.

And business expectations bounced to 61.0 in August from a series low of 56.1 in July -- also the first time that index has improved since February.

“Just over 40 per cent of the survey panel forecast a rise in business activity in 12 months' time, with a number signalling optimism that economic conditions will improve over the year, boosting new orders and revenues,” the survey said.

“However, the overall degree of sentiment remains well down on the survey average, and there were again concerns that the economic downturn would intensify, with real fears of recession in the coming months.”

Nonetheless, cooling oil prices appear to have helped ease cost pressures for services sector firms, with the input price index falling to 66.8 from 70.2 in July, its lowest since March.

Firms also raised their prices at a less aggressive rate last month, and the prices charged index slipped to 55.2 from 55.9, the weakest since April.

The CIPS/Markit manufacturing survey on Monday indicated that sector also shrank for a fourth straight month in August, although its headline index unexpectedly improved from July.However, the corresponding construction survey reported a sixth successive month of declines last month.—Reuters