LONDON, June 23 (Reuters)- - Euro zone business growth decelerated more than expected this month, suggesting the current quarter's economic performance won't match the strong pace set at the start of the year, a survey showed.


A surprising bounce in manufacturing activity was not enough to offset a marked slowdown in service industry growth, according to Markit's flash Purchasing Managers' Indexes.


One of the first growth indicators in a month, the composite PMI fell to a 17-month low of 52.8 from May's 53.1. A Reuters poll had predicted a more modest dip to 53.0.


"There was some support to growth from the wider global economy, but the countering force of that is more political uncertainty, especially in France, but also in the wider euro area," said Chris Williamson, chief economist at Markit.


French unions have been protesting since early March about planned labor reforms while Britain, which is outside the currency bloc, is holding a referendum on whether to leave the wider European Union.


Of concern to policymakers at the European Central Bank, companies cut prices at a slightly sharper rate this month. The output price index fell further below the 50 mark that separates growth from contraction, coming in at 49.2.

Inflation was -0.1 percent in May, nowhere near the central bank's target of close to but below 2 percent.

Yet discounting failed to drive growth in the dominant service industry. Its PMI slumped to 52.4 from 53.3, below even the lowest forecast in a Reuters poll.

"While demand is just about growing strong enough to generate employment, it's not strong enough to give firms pricing power," Williamson said.

Therefore companies were less optimistic. The business expectations index fell to 61.9 from 62.8, its lowest reading in almost a year.

The picture was far brighter for manufacturing. The factory PMI leapt to a six-month high of 52.6 from 51.5, above all the forecasts in a Reuters poll. A sub-index measuring output was 53.8, up from 52.4.

That surge in activity was driven by new orders growing at their fastest rate this year. The sub index was 53.4 compared with May's 51.7.

Williamson said the PMIs point to second-quarter growth of 0.4 percent, slightly faster than the 0.3 percent predicted in a Reuters poll earlier this month. The economy expanded 0.6 percent in the first quarter.


((Editing by Larry King))