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Euro zone business growth slows in August, prices fall: PMI

By Jonathan Cable

LONDON, Aug 21 (Reuters) - Euro zone private business growth slowed more than expected this month, despite widespread price cutting, as manufacturing and service industry activity both dwindled, a survey showed on Thursday.

Euro zone economic growth ground to a halt in the second, quarter, dragged down by a shrinking economy in Germany and a stagnant France, even before any impact from sanctions imposed on and by Russia over Ukraine.

Markit's Composite Purchasing Managers' Index (PMI) will provide gloomy reading for the European Central Bank (ECB), suggesting its two biggest economies are struggling like smaller members.

Based on surveys of thousands of companies across the region and a good indicator of overall growth, the Composite Flash PMI fell to 52.8 from July's 53.8, far short of expectations in a Reuters poll for a modest dip to 53.4.

However, readings above 50 still indicate expansion. Markit said the data point to third-quarter economic growth of 0.3 percent, matching predictions from a Reuters poll last week.

"We are not seeing a recovery taking real hold as yet. We are not seeing anything where we look at it and think 'yes, this is the point where the euro zone has come out of all its difficulties'," said Rob Dobson, senior economist at Markit.

The euro zone has also yet to feel the full effect of escalating tensions with Russia. Europe stung Moscow with economic sanctions, prompting a

tit-for-tat response from Russian President Vladimir Putin, over the Kremlin's support for rebels in eastern Ukraine.

The composite PMI in Germany - Russia's biggest trade partner in the European Union which has already seen exports to the country plunge in the first half of the year - fell to 54.9 from 55.7.

For France, the euro zone's second largest economy, the Composite PMI rose from 49.4 to the break-even mark at 50.

PRICES FALL

Struggling to support growth while battling the threat of deflation, the ECB is providing another round of temporary access to cheap cash for banks. There is also a one-in-three chance it embarks on an asset purchase program next year, a Reuters poll showed. [ECILT/EU]

Consumer prices in the euro zone rose just 0.4 percent on the year in July, the weakest annual rise since October 2009 at the height of the financial crisis, and well within the ECB's "danger zone" of below 1 percent.

Worryingly, according to the composite output price index firms cut prices for the 29th month - and at a faster rate than

in July. It dipped to 48.9 from 49.0.

Also of concern, suggesting factories do not expect things to improve anytime soon, manufacturing headcount fell at the fastest rate in nine months. The sub-index dropped to 49.1 from 49.9.

Optimism about the future also sank among services firms - the business expectations index plummeted to 58.6 from 61.7, its

lowest reading in a year.

The manufacturing PMI fell to 50.8 from 51.8, below the consensus forecast for 51.3 and its lowest since July 2013. The output index, which is used to calculate the composite PMI, sank to 50.9 from 52.7. The services PMI fell in line with expectations to 53.5 from 54.2.

(This corrected version of the story fixes month in headline to August, not July).

(Editing by Toby Chopra)

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