Sterling cuts gains after weak UK PMI

* Pound cuts gains vs dlr, euro after weak UK data * UK services PMI falls to 16-month low of 51.3 in Aug

* Traders now await key U.S. jobs data at 1230 GMT

By Jessica Mortimer

LONDON, Sept 3 (Reuters) - Sterling cut gains against the dollar and the euro on Friday after much weaker-than-forecast UK services sector data raised concerns that economic growth could falter later in the year.

British service sector activity grew at its slowest pace since April 2009, with a marked fall in hiring as employers worried about an economic slowdown and public spending cuts, a purchasing managers' survey showed. [ID:nSLA2KE6BQ]

Sterling's falls were limited, however, as the market turned its focus to U.S. jobs data, due at 1230 GMT, which is expected to provide direction for currency markets. A weak figure could spark a renewed rise in risk aversion, however, which would knock sterling further.

"The UK PMI data was particularly weak and raises concerns about the robustness of the UK recovery. It's not surprising sterling has sold off as a result," said Geraldine Concagh, economist at AIB Group Treasury in Dublin.

"But with the initial reaction out of the way we are likely to settle back into a range ahead of this afternoon's payrolls numbers, where anything weaker than the 100,000 fall expected would weigh on risk appetite and hit sterling."

At 0942 GMT, sterling was steady against the dollar at $1.5405 GBP=D4, having fallen around half a cent following the UK PMI data to take it back below its 200-day moving average, currently at $1.5423.

Technical analysts highlighted key support for the pound at $1.5322, the 38.2 percent retracement of the May to August rally, just below Tuesday's five-week low of $1.5327.

The euro rose 0.1 percent to 83.31 pence EURGBP=D4, turning higher after earlier falls and taking it close to a three-week high of 83.47 hit on Thursday.

"Euro/sterling trades above 83.00 pence and a sustained hold opens a test of 83.85/90," RBC analysts said in a note.

Economists expect U.S. payrolls data to show a decline of 100,000 jobs overall in August, and a rise of 41,000 private sector jobs, with a weak number likely to exacerbate concerns about a softening U.S. economy. [ID:nN31235915]

UK GROWTH WORRIES

Markit/CIPS said the headline services PMI index dropped to 51.3 in August from July's 53.1, a much sharper fall than the decline to 52.9 forecast in a Reuters poll.

The drop takes the index close to the 50 level, below which would mark contraction. Analysts said this has increased the risk that the economy could slip back into recession and that the Bank of England may resort to more quantitative easing (QE).

The weak number is of particular concern because of the importance of the services sector to the UK economy and the fact that it follows recent soft data on the manufacturing, housing and construction sectors.

"This amounts to a distinctly lacklustre survey which will no doubt fuel concerns about a double dip," said Ross Walker, economist at RBS.

"The BoE has traditionally paid a lot of attention to this services PMI survey - the sector accounts for three-quarters of UK output ... We doubt August's print will be enough to prompt a policy change from the Monetary Policy Committee next week, but the risks of dissenting votes in favour of more QE are rising."

There was further bad news on the UK on Friday, with figures showing new construction orders tumbled 14 percent in the second quarter and dropped 9 percent on the year, their first decline in more than a year. [ID:nLDE6820K5] (Reporting by Jessica Mortimer; Editing by Susan Fenton)