LONDON, April 23 (Reuters) - Business activity in the euro zone suffered a surprise contraction in April with the U.S.-Israeli war with Iran sapping demand as prices soared, a closely watched survey showed on Thursday.
Demand for services sank but was contradicted by an unexpected rise in manufacturing momentum.
The S&P Global Flash Eurozone Composite Purchasing Managers' Index fell to 48.6 in April from March's 50.7, far below expectations in a Reuters poll for a more modest dip to 50.1.
That was beneath
the 50.0 mark separating growth from contraction.
"The euro zone is facing deepening economic woes from the war in the Middle East, presenting a major headache for policymakers," said Chris Williamson, chief business economist at S&P Global.
"Increasingly widespread supply shortages meanwhile threaten to dampen growth further while adding more upward pressure to prices in the coming weeks."
Since the conflict began nearly two months ago fuel prices have rocketed. The input price index jumped to 68.4 from 65.3, its highest reading since late 2022.
An index covering the bloc's dominant services industry sank to 47.4 from 50.2, far below a median prediction in the Reuters poll for a gentler slide to 49.8.
Demand for services fell at the sharpest rate since October 2023. The new business index came in at 46.3 compared to 48.6 last month.
The manufacturing PMI was 52.2, up from March's 51.6, confounding poll expectations for a fall to 50.9. An index measuring output nudged higher to 52.2 from 52.0.
But factories faced soaring production costs. The input prices index surged to 76.9 from 68.9.
Soaring price pressures have led to financial markets pricing nearly four rate hikes by the European Central Bank this year, starting June.
"The ECB once again has the unenviable task of deciding whether to raise interest rates in the face of the worrying inflation picture, or whether this price spike will prove temporary and its focus should instead be on the need to prevent the economy sliding into a deeper downturn," Williamson added.
(Reporting by Jonathan Cable; Editing by Joe Bavier)
