A closely watched survey has shown that the euro zone's service sector shrank unexpectedly this month, reviving fears that the economy risks sinking into recession.

Markit's Eurozone Services Purchasing Managers' Index (PMI) fell to 49.4 from January's 50.4. Any figure below 50 means activity fell.

"There is a possibility GDP will be flat but chances are we could easily slide back into a very small contraction," said Chris Williamson, chief economist at data compiler Markit.

The euro zone economy contracted 0.3% in the last quarter of 2011 so a second quarter of contraction would meet the technical definition of recession.

The euro zone's manufacturing sector fared little better, with the PMI barely rising to 49 from January's 48.8, spending its seventh month below 50 and missing expectations for a faster rise to 49.5.

The factory output index held steady at January's 50.4 but new orders fell for the ninth month, with the index at 47.1, slightly up from January's 46.5.

"We need order growth to pick up but it is still in decline, they are still relying on their pipeline of previous orders to sustain these levels of activity. In the service sector they are stimulating demand through price cuts, manufacturers are also squeezing their margins," Williamson said.

Although input costs continued to rise, services firms were forced to cut their prices charged for the third month running, with that sub-index falling to 48.3 from January's 48.7, its lowest reading since July 2010.

Despite the price cutting to win business, the composite PMI, which combines the services and manufacturing data and is often seen as a growth indicator, fell to 49.7 from last month's 50.4.

The flash data was collected largely before euro zone finance ministers agreed a €130 billion bail-out rescue for Greece and Markit said this could lead to sharper than normal revisions when final figures are released at the start of March.

Private sector firms reduced their workforce for the second month running in a bid to cut costs with the composite employment index only nudging up to 49.5 from January's 49.4.