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ROME Italy's service sector shrank for the 16th month in a row in September, albeit at the slowest pace since January, with a drop in new business and one of the sharpest falls in employment since 2009, data showed on Wednesday.

The Markit/ADACI Business Activity Index, covering service companies from hotels to banks, rose to 44.5 from 44.0 a month earlier, but remained well below the 50 line separating growth from contraction.

The data underlines the gloomy economic picture facing Prime Minister Mario Monti's government, which last month cut its growth forecast, saying it expected a 2.4 percent contraction in 2012 and a 0.2 percent decline in 2013.

But after the equivalent PMI survey for the manufacturing sector showed factory activity contracting last month at the slowest rate since March, it offered some hope that the worst phase of a recession that began in 2011 may have passed.

The PMI data showed new orders falling for the 17th month in succession, a decline attributed by survey participants to uncertainty among clients.

It said service companies continued to cut staffing levels and said the rate of decline in employment accelerated for the fourth month in a row to the fastest pace since the series record in June 2009.

More than 21 percent of survey respondents cut staffing levels compared with August, mainly due to falling workloads and cost-cutting efforts.

As business declined, firms charged less in a bid to lure buyers, leading to a fall in average prices in September.

On the other hand, pressure on costs also eased, with inflation dropping to the slowest in 10 months. Where companies saw increases in average costs, this was put down to energy and transport.

The sharp jump in business expectations seen in August also fell away, although companies still generally expected a pickup within the coming year.

- Detailed PMI data are only available under license from Markit and customers need to apply to Markit for a license.

To subscribe to the full data, click on the link below:

For further information, please phone Markit on +44 20 7260 2454 or email economics@markit.com

(Reporting By James Mackenzie; Editing by Hugh Lawson)

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