The eurozone's dominant service sector expanded much slower than expected in December but its manufacturing sector, which led a large part of the economic recovery, grew faster than thought, surveys show.

Worryingly for policymakers, a large part of the strength was on the back of a very positive performance in Germany and a supportive France, which outshone other member states.

“Possibly the divergence is growing wider. Growth in Germany is near a record rate … France has been a strong performer as well as far as PMIs go,” said Chris Williamson at Markit.

“When you strip France and Germany out of the eurozone figures we can see that in December growth of activity across services and manufacturing slowed down almost to stagnation.”

Markit's Eurozone Flash Services Purchasing Managers' Index, made up of surveys of around 2,000 businesses ranging from banks to restaurants, slumped to 53.7 in December from November's 55.4.

The index has now been above the 50.0 mark that divides growth in business activity from contraction since September 2009, but it was well shy of the consensus forecast in a poll for 55.2.

The manufacturing sector saw activity pick up faster than expected, driven by a buoyant Germany and strong new orders.

The flash manufacturing index rose to its highest level since April at 56.8 in December from 55.3 in November, confounding forecasts for a fall to 55.2, while the output index bounced to 57.8 this month from 55.8 in November.

Earlier data from Germany, Europe's largest economy, showed its service sector slowed more than expected, shy of November's more than three-year record, but its manufacturing sector expanded much more than predicted.

In neighbouring France both services and manufacturing activity grew at a slower pace than was expected, but Markit said this could be partly due to severe weather and protests over government pension reforms.

The eurozone composite index, made up from the services and manufacturing sectors and often used to predict overall growth, dropped to 55.0 this month from 55.5 in November, missing expectations for 55.4.

Markit said the data pointed to fourth-quarter euro zone growth of 0.5 percent, up from the 0.4 percent growth official figures showed for the third quarter with support from a strong Germany. The economy expanded one percent in the second quarter.

A poll of more than 50 analysts published on Wednesday forecast the economy would grow 0.3 to 0.5 percent per quarter through to the end of 2012.

Optimism, prices rise
While activity may have slowed in the service sector, firms were more optimistic about the longer term outlook, with business expectations rising to 66.5 from 66.3 in November. The index hit a near four-year high of 69.3 in April.

Data showed manufacturers were able to pass on some of the rising raw material costs as the output price index rose to 55.4 in December from November's 55.2, marking its highest reading since August 2008.

Service sector firms were able to raise prices for the first time since October 2008.

“There is growing evidence that we are seeing a pass-through of cost pressures, certainly among manufacturers. We are finally seeing some improved pricing power in the service sector,” Williamson said.

But companies hired fewer new workers this month, with the composite employment index dipping to 52.3 from November's 33-month high of 53.1. Manufacturers took on more staff than they have done since July 2007 but this was offset by fewer new hires in the service sector.

Official data showed unemployment in the bloc nudged up to 10.1 percent in October from 10.0 percent in September.