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LONDON (Reuters)- A sharp drop in new orders compounded the misery among euro zone companies during July, a business survey showed on Friday, forcing firms to lay off staff at the fastest pace since January 2010.
Markit's composite purchasing managers index (PMI), gauging the health of thousands of euro zone companies, rose marginally in July to 46.5 from 46.4 in June, but still well below the 50 threshold that marks growth.
The PMI, which has a good record of tracking economic growth, gave little hope of an imminent turnaround as the euro zone's sovereign debt crisis now threatens the funding needs of major economies like Spain and Italy.
Order books shriveled at the fastest rate since June 2009 - a much worse situation than portrayed in the flash reading two weeks ago, and one that augurs badly for business activity in August.
While companies in Italy and Spain performed particularly poorly in July, the PMI showed the euro zone's biggest and most resilient economy is now floundering too.
"The big worry is that the downturn in Germany may be becoming more entrenched, suggesting that the largest euro economies are seeing convergence in collective and mutually-reinforcing decline," said Chris Williamson, chief economist at survey compiler Markit.
European Central Bank President Mario Draghi warned the risks to economic growth in the euro zone are on the downside after its policy meeting on Thursday, while sidestepping immediate action to calm the debt crisis.
Williamson said the PMI was consistent with a 0.6 percent quarterly rate of decline for the euro zone economy - far worse than the 0.1 percent decline for this quarter predicted by economists polled by Reuters two weeks ago. <ECILT/EU>
The survey's jobs index fell to 47.2 from 48.3 in June, meaning companies cut jobs at the fastest rate since January 2010 and marking a seventh straight month of layoffs.
The euro area's jobless rate hit a new high of 11.2 percent in May and June, with unemployment nearing 25 percent in Spain, the latest economy to become a flashpoint in the 2-1/2-year old sovereign debt crisis.
The PMI for the services sector, which accounts for the bulk of the euro zone's private economy, rose in July to 47.9 from 47.1 in June - a four month high and revised up from the preliminary reading of 47.6.
"With incoming new business falling at the fastest rate for three years and service sector companies becoming the gloomiest about the outlook since early 2009, there seems little prospect of any improvement soon," said Williamson.
The business expectations index fell from 52.1 to 50.0, its lowest ebb since March 2009, at the height of the Great Recession.
The PMI also suggested inflation will ease further in the coming months, as companies cut prices offered to consumers for a seventh month.
European Central Bank President Mario Draghi said on Thursday inflation should decline further to below the central bank's 2 percent target ceiling in 2013.
Editing by Toby Chopra