UPDATE 1-UK service sector shrinks at record pace in Nov

(adds reaction)

* Weakest headline index since series began in July 1996, seventh straight month of contraction.

* Weakest employment, new business, outstanding business and expectations index levels since series began

* Output prices fall first time in seven years; input prices rise at slowest pace since March 2002.

* Reports of trouble getting credit as lenders tighten terms

By Christina Fincher

LONDON, Dec 3 (Reuters) - Britain's dominant services sector shrank in November at its fastest pace since the series began in 1996 as new business, employment and confidence fell at record rates, a survey showed on Wednesday.

Coming hard on the heels of grim manufacturing and construction data earlier this week, the report boosted expectations the Bank of England will slash interest rates by a full percentage point on Thursday, knocking the pound.

The Chartered Institute of Purchasing and Supply/Markit purchasing managers' index for the sector fell to 40.1 last month from 42.4 in October. That was below the consensus forecast of 41.2 and marked the seventh month below the growth threshold of 50.

"I think a combination of much weaker activity and some early hints at deflation will give the Bank of England confidence they can cut rates more aggressively," said Ross Walker at RBS.

The services sector spans businesses from cafes to banks, and makes up three quarters of British economic output. It has been in the front line of fire as a global shortage of capital has forced banks to rein in lending.

Britain's economy contracted in the third quarter for the first time since the recession of the early 1990s and surveys suggest the final three months of the year will be just as bad, if not worse.

"Combined with the appalling numbers for manufacturing and construction, the survey confirms that recession is now snowballing and heading into deeper territory as 2008 draws to a close," said Paul Smith, senior economist at Markit Economics.

CONFIDENCE CRUMBLED

The index measuring business expectations fell below 50 for the first time in the survey's history, suggesting efforts to kick-start the economy with both monetary and fiscal levers have yet to have the desired effect.

The Bank of England has already slashed interest rates by two percentage points since October, taking them to 3 percent, their lowest since the early 1950s.

The government, meanwhile, has taken unprecedented steps to recapitalise the country's banking system and unveiled a 20 billion pound package of tax cuts and short-term public spending increases.

Despite the bail-out, some companies reported that lenders had tightened terms over the past month.

"It seems inevitable that the Bank of England will deliver another substantial rate cut on Thursday as it tries desperately to support growth and confidence," said Markit Economics' Smith.

"So far, the Bank appears to be losing the battle, with evidence from the latest survey suggesting that credit conditions remain extremely tight." The survey also gave some support to concerns that deflation -- not inflation -- will be policymakers' biggest worry going into next year.

Prices charged by services firms fell last month for the first time in 7 years, while input costs rose at their slowest pace since early 2002.

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(Editing by Ruth Pitchford)