* HSBC Services PMI drops to 50.3 in March from 52.1 in Feb
* Composite PMI falls to 51.0 from 52.9
SAO PAULO, April 3 (Reuters) - Growth in Brazil's services activity slowed in March to the weakest pace in seven months, feeding doubts about the strength of an economic recovery this year and weakening the case for a hike this month in central bank interest rates.
HSBC's Purchasing Managers Index (PMI) for the Brazilian services sector dropped to 50.3 in March from 52.1 in February on a seasonally adjusted basis, signalling services' providers barely grew last month. Readings above 50.0 indicate expansion and readings below 50.0 signal contraction.
"We are surprised with the decline," said Andre Loes, chief Brazil economist at HSBC, in Sao Paulo, who recently cut his economic growth forecast for Brazil to 2.6 percent this year from 3.0 percent previously. "We expect only a modest recovery of economic activity in 2013."
Last week the central bank forecast economic growth of 3.1 percent this year. That level of growth would be above the meager 0.9 percent expansion Brazil posted for 2012 but below the 4 percent projected for 2013 by the finance ministry..
In that context, the weaker-than-expected PMI results seem likely to reinforce market bets that the central bank will not raise interest rates in its next monetary policy meeting on April 17.
Bondholders and some other investors see higher inflation rather than weak growth as the biggest economic threat. In their view, the central bank should raise interest rates to curb inflation, which is threatening to pierce the central bank's annual inflation target ceiling of 6.5 percent.
The central bank last October lowered its benchmark interest rate to an all-time low of 7.25 percent to stimulate domestic demand to spur economic growth.
HSBC's Composite Output Index for Brazil, which includes both the services sector and manufacturing data, also fell to 51.0 from 52.9 in February, HSBC said. The HSBC manufacturing PMI for Brazil, released on Monday, showed Brazilian manufacturing expanding at the slowest pace in three months.
In recent years, the rapid growth in Brazil's services sector has contributed to record-low unemployment rates, which has had profound implications on one of the world's most unequal societies. In Brazil, more than 30 million people were lifted out of poverty in the past decade.
New business for Brazilian service sector increased at the slowest pace in five months, the PMI released on Tuesday showed, according to the PMI survey.
But employment in the service sector rose in March after a drop in the previous month. Prices charged by services' providers also rose moderately, and input costs posted a solid increase, the survey added.