The euro zone's economic recovery from its deepest downturn on record stuttered this month, particularly in services, as the pent-up demand unleashed last month by the easing of coronavirus lockdowns dwindled. 

To contain the spread of the virus, governments imposed strict lockdowns - forcing businesses to close and citizens to stay home, bringing economic activity to a near halt. 

After many of those restrictions were relaxed, activity in the euro zone expanded last month at the fastest pace since mid-2018.

But as infection rates have risen again in parts of the region, some earlier curbs have been reinstated. 

Likely to be a source of concern to policymakers and diminishing hopes for a V-shaped recovery, IHS Markit's flash Composite Purchasing Managers' Index, seen as a good gauge of economic health, sank to 51.6 from July's final reading of 54.9. 

While still above the 50-mark separating growth from contraction it was below all forecasts in a Reuters poll which had predicted no change from July. 

"The euro zone's rebound lost momentum in August, highlighting the inherent demand weakness caused by the Covid-19 pandemic," said Andrew Harker, economics director at IHS Markit. 

"The recovery was undermined by signs of rising virus cases in various parts of the euro area," he said. 

An index measuring new business dropped to 51.4 from 52.7 and once again some of August's activity was derived by businesses completing backlogs of work. 

Meanwhile, growth in the bloc's dominant service sector stalled - its PMI plummeted to 50.1 from 54.7, below all forecasts in the Reuters poll that predicted a small dip to 54.5. 

With demand waning, services firms cut headcount for a sixth month in a row and more sharply than in July. The employment index fell to 47.7 from 47.9. 

Still, factory activity - which did not suffer quite as sharp a decline as the service industry during the height of the pandemic - expanded for a second month.

The manufacturing PMI dipped to 51.7 from 51.8, confounding the Reuters poll forecast for a rise to 52.9. 

An index measuring output, which feeds into the composite PMI, rose to 55.7 from 55.3. 

Suggesting factory purchasing managers do not expect a big pick up in activity, they bought fewer raw materials. The quantity of purchases index only rose to 49.6 from 48.3. 

A full bounceback from the euro zone's deepest recession on record will take two years or more, according to a Reuters poll of economists published earlier this week. 

"The euro zone stands at a crossroads, with growth either set to pick back up in coming months or continue to falter following the initial post-lockdown rebound," Harker said.