The services sector, a key growth driver last year, showed signs of flagging in April, according to the latest purchasing managers' index.

Fall-out from the Iraq war and anxiety over the Sars virus pushed the NCB services index below the neutral 50 line, the first contraction since November 2001.

Tourism and transport were worst hit, slumping to 43.9 from 44.4 in March. Business services continued to buck the trend, growing modestly at 50.4. Confidence in the economy's ability to rally slipped three points to 70.7.

The rate of increase in costs fell to a five-month low but remains ominously high at 64.5.

The labour market predictably bore the brunt of the slow-down with the employment index tumbling to 46.7 from 50 in March. Anecdotal evidence suggested employers were cutting staff to cope with softening orders and rising overheads.

"The gradual slowing in the rate of growth in services activity has slipped in the most recent months to a small outright decline in activity," said Mr Eunan King, an economist at NCB stockbrokers. "Competition is keen, spare capacity is rising and incoming new business is declining slightly. Sars appears to have replaced Iraq as a concern in the services sector," Mr King said

"Wages are firm for key staff, though employment overall continues to decline slowly."

The slump was in line with other European economies. A survey of 2,000 euro zone companies showed the services index holding steady at 47.7 in defiance of analyst predictions of a slight rise.

However, the expectations index, which measures whether companies think business will be better in 12 months , rose markedly in April to 62.6 from 59.6 in March.

"There are some very embryonic signs here that sentiment is beginning to bottom out and consolidate," said Mr David Brown at Bear Stearns in London.

"It's too early to read in any post-war rebound in business optimism just yet in the services sector, but we could be getting closer to the end of the downturn in terms of business sentiment both for manufacturing and services."

Even so, he said, the euro zone needed an early official rate cut.

An equivalent survey from the United States on Monday showed the service sector there expanded unexpectedly in April, as the end of the Iraq war gave a small shot of confidence.

The US Institute for Supply Management's index of non-manufacturing activity rose to 50.7 from 47.9 in March. The average forecast from economists polled by Reuters was 48.8.