The euro zone's private sector grew at its weakest pace in almost two years this month as demand from abroad fell and the region's ongoing debt crisis weighed on minds at home, business surveys showed on Thursday.

In a fresh sign economic growth is slowing fast, the 17-nation bloc's manufacturing sector virtually ground to a halt in July while its dominant service sector grew at its slowest rate in 22 months.

It's very disappointing. It's across the board, there is a widespread weakness. Excluding France and Germany activity fell for the second month running, said Markit's Chief Economist Chris Williamson.

The Flash Markit Eurozone Services Purchasing Managers' Index (PMI) sank to 51.4 this month from 53.7 in June, its lowest level since September 2009.

The index, which measures the activities of companies ranging from banks to restaurants, fell far short of expectations for 53.0 but has been above the 50 mark that divides growth from contraction for nearly two years.

A similar slump was seen in the flash manufacturing PMI, which fell to 50.4 from 52.0 in June, its lowest reading since September 2009 and missing consensus expectations in a Reuters poll for 51.5.

Output in the sector, which drove a large part of the recovery in the euro zone, shrank for the first time in two years, with the index falling to 49.5 from 52.5, its lowest since July 2009.

Factories also saw new orders falling for the second month running, with the index sliding to 47.6 from 49.8, its lowest reading since June 2009.

Exports fell for the first time since July 2009 so we have a continuation of weakness in overseas markets generally and at the same time home markets are being squeezed by worries in relation to the sovereign debt crisis, Williamson said.

The glum indexes meant the euro zone composite PMI, a broader measure of the private sector which combines the services and manufacturing data, collapsed to 50.8 from 53.3, well below forecasts for 52.6.

The composite index is often used as a guide to growth and Markit said if the PMIs remained at current levels there would be no economic growth in the third quarter.

Economists polled by Reuters this month predicted growth of 0.4 percent this quarter.

DEBT DEFYING

A debt crisis, which has so far seen Greece, Ireland and Portugal seeking bailouts, has continued to roil the bloc and in recent weeks fears have grown that it will engulf Italy and Spain as well.

Euro zone officials and bankers have been struggling to pin down a package of measures to persuade markets that Greece can be saved from default and the rest of the euro zone from contagion.

An earlier release from Germany, Europe's largest economy, saw its composite PMI staging the biggest one month fall since late 2008, slumping to 52.2 from June's 56.3.

The picture was little better in France, where the composite index fell to a 23-month low of 52.8 from June's 54.9.

But in the face of the intensifying debt crisis and an onslaught of downbeat data the ECB raised interest rates earlier month for the second time this year, and signaled another hike is likely later in the year.

Economists expect the ECB to raise rates one more time this year, to 1.75 percent, followed by another hike in the first three months of 2012.

Despite this, service sector firms increased prices faster than last month, with the output price index rising to 53.0 from June's 52.4, matching April's 33-month high.

That was very surprising and I am not convinced it will continue to increase as there is so much competitive pressure out there and the fact that input prices rose at their weakest rate for seven months, said Williamson.

In one bright spot for policymakers businesses continued to take on new workers, and at a slightly faster rate than in June, with the composite employment index rising to 52.2 from June's 8-month low of 52.0.

(Editing by Toby Chopra)

Portugal Germany