Business activity across the euro zone unexpectedly accelerated this month as consumers splashed out on services, but weakening demand for manufactured goods deepened the downturn in the factory sector, a survey showed.

S&P Global's flash Composite Purchasing Managers' Index (PMI), seen as a good gauge of overall economic health, bounced to a 10-month high of 54.1 in March from February's 52.

That was well above the 50 mark separating growth from contraction and above all forecasts in a Reuters poll which had predicted a dip to 51.9.

"The euro zone economy is showing fresh signs of life as we enter spring. The survey is consistent with GDP growth of 0.3% in the first quarter, accelerating to an equivalent rate of 0.5% in March alone," said Chris Williamson, chief business economist at S&P Global.

A Reuters poll earlier in March predicted a 0.1% contraction in gross domestic product (GDP) this quarter.

Solid demand, at a 10-month high, meant firms were unable to complete all orders for the first time since June. The backlogs of work index rose to 50.1 from 49.5, just above breakeven.

A PMI covering the bloc's dominant services industry jumped to 55.6 this month from 52.7, well above all forecasts in the Reuters poll which had predicted a decline to 52.5.

To cope with the increase in activity firms took on additional staff at the fastest pace since May last year. The employment index bounced to 54.3 from 51.9.

However, it was a different picture for factories. The headline manufacturing PMI fell to 47.1 from February's 48.5, confounding expectations in the Reuters poll for an uptick to 49.

An index measuring output, which feeds into the composite PMI, slipped back below breakeven to 49.9 from last month's 50.1.

"Growth is very unbalanced, driven almost solely by the service sector with manufacturing largely stalled and struggling to sustain production in the face of falling demand," Williamson said.

Record improvements to supply chains meant the cost of raw materials fell for the first time since June 2020, when the Covid pandemic was cementing its grip on the world. The input costs index slipped to 46.4 from 50.9.

That will likely be welcomed by policymakers at the European Central Bank who increased interest rates last week, sticking with their fight against inflation despite recent turmoil in the banking sector.