Euro-zone private-sector growth cooled in August as factory order growth hit its weakest level since late 2005 and a credit squeeze in financial markets bruised service-sector confidence, key data showed yesterday.

The hit to sentiment was the biggest since October 2002, in the run-up to the Iraq war, and brought expectations to their weakest since March 2003, during the Iraq invasion.

The survey was conducted mainly during the recent market turmoil. While the RBS/NTC Economics flash purchasing managers' indices (PMIs) suggested only a mild slowdown for now, the souring in sentiment as stocks and currencies gyrated and lending between banks jammed up in August suggests activity may cool off somewhat in September.

"The important thing to bear in mind is that the PMI data have already been trending down for about a year now, and that the down trend does not seem to have accelerated with the latest turbulence in financial markets," said Sandra Petcov, euro-zone economist at Lehman Brothers.

Services activity held up, as did growth in prices charged. The flash services PMI slipped to 57.9 in August from 58.3, but was only slightly below expectations of 58.0 and just below one-year highs marked in the previous two months. The 50.0 mark divides growth and contraction.

The flash manufacturing PMI fell to 54.2 from 54.9, below the 54.5 economists had expected and the weakest since January 2006. New orders growth fell to its weakest since November 2005.

The flash composite PMI slipped only modestly to 57.2 from 57.5, suggesting the economy is still growing strongly although on a slowing trend.

"To the extent that expectations become seriously gloomy, enough to affect firms' decisions about production, investment and hiring, this warrants keeping an eye on," said Ms Petcov.

Company evidence has also yet to show worrying signs. The latest earnings season in Europe was far from disappointing, and only the turmoil in the credit markets hauled stock markets off their bullish march upward.

Financial markets did not react to the data.

"If you were looking at those numbers without what is happening in terms of financial conditions and the financial market adjustments, you would feel very comfortable to raise rates," said Jacques Cailloux, chief euro-zone economist at RBS. "[ But] we know that confidence has been hit hard."