Growth in the services industry slowed for the third consecutive month, fuelling fears of further job losses in the sector.

The NCB purchasing managers' services index reported a dip in the rate of expansion in January to 51.2 from 52.7. A reading above 50 indicates an increase in activity.

Ominously, employment shrunk for the seventh month running while costs continued to substantially outstrip inflation.

The employment index rose moderately to 47.8 from 47.2 but its failure to reach the 50 point threshold suggested a pronounced rate of job shedding, NCB said.

Tourism and leisure posted the highest level of lay-offs, scoring 41.1 on the NCB scale. Financial services rated highest for employment at 53.1.

Overheads climbed again to record the highest growth levels for seven months. Wage increases and mounting insurance costs were cited as the chief contributory factors.

Financial services registered the best overall performance, achieving a 55.2 rating, down from 58.2 in December.

Signs of recovery emerged in technology and telecoms, which climbed to 44.6 from 44.1.

Tourism fared worst at 40.6 although this was a measurable improvement over the previous month's finish of 36.1.

New business growth fell short of expectations, with only the business services sector rating higher than 50 points.

Companies polled by NCB were generally hopeful of recovery this year. Many expected to expand over coming months. High-tech firms were the most upbeat, achieving a 78.9 rating. Financial services was least buoyant at 68.8.

Analysts said the prospect of war in the Gulf had created an atmosphere of uncertainty that was harming investment and slowing demand.

Further contraction on the labour market was likely, said Mr Niall Dunne, Ulster Bank financial markets economist.

But NCB chief economist Mr Dermot O'Brien sounded a more positive note, saying continued growth was a welcome result in an uncertain climate. "Rising cost pressures, however, are a concern given their negative implications for employment," he added.

Consumer sentiment held firm last month, due in large part to the January sales.

The index of consumer sentiment inched upwards to 64.5 from 63.8 in December, IIB Bank said in its monthly review. But fears of war in the Middle East could impact negatively on the public mood and push consumer sentiment downwards in February, IIB warned. Average household spending power had fallen as a result of measures in the last budget, the bank said.