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STORY: Euro zone business activity contracted sharply and unexpectedly this month.

Data from a key survey released Monday (September 23) also showed the bloc's dominant services industry flatlined, while a downturn in manufacturing accelerated.

The preliminary composite euro zone Purchasing Managers' Index - or PMI - sank to 48.9 this month from August's 51.0.

It was below the 50 mark which separates growth from contraction for the first time since February, and missed analyst forecasts.

The downturn appeared to be wide-ranging.

Europe's largest economy Germany saw its decline deepen, and France returned to contraction following August's Olympics boost.

Overall demand fell at the fastest rate in eight months, while the new business index also plunged.

A services PMI sank to 50.5 from 52.9 - well below analyst projections - and that was despite firms raising charges at a shallower rate.

Services inflation eased and the output prices index also dropped to its lowest reading in three and a half years.

One leading economist argued the euro zone is heading towards stagnation.

But they also said news that both input and output price inflation has slowed down will be welcomed by the European Central Bank, which has closely watched out for persistently high inflation in services.

The ECB cut interest rates again in mid-September and signaled a "declining path" for borrowing costs in the months ahead, as inflation slows and economic growth in the euro zone falters.

The PMI covering manufacturing has been sub-50 for more than two years and the trend continued as it dropped to 44.8.

Business optimism also weakened, suggesting purchasing managers do not expect an imminent turnaround.