India's service sector contracted for a second straight month in October, as new business grew at its weakest pace since May 2009, a survey showed on Thursday, dragged by sagging global demand and tight monetary policy.

The seasonally adjusted HSBC Markit Business Activity Index , based on a survey of around 400 firms, slumped to 49.1 in October, its lowest reading in two-and-a-half years and below the 50-mark which separates growth from contraction. It was at 49.8 in September.

"The momentum in the services sector eased further in October with business activity declining sequentially and new orders expanding at a slower clip," said Leif Eskesen, economist at HSBC.

"This reflects the lagged impact of the monetary policy tightening undertaken so far."

The growth rate of new business slowed to its weakest since May 2009, while outstanding business levels ground to a near halt as unemployment levels continued to inch up.

"On the inflation front, there was some relief with both prices charged and input costs rising less rapidly, although the former are still climbing fast by historical standards," Eskesen said.

India's most closely watched inflation gauge, the wholesale price index for September rose 9.72 per cent on an annual basis, a touch lower than August's 9.78 per cent.

"The numbers confirm some re-balancing between growth and inflation risks, supporting the RBI's (Reserve Bank of India's) decision to signal a pause in the near term," Eskesen said.

The RBI raised interest rates last month for the 13th and possibly final time in a tightening cycle that began in early 2010, on expectations that persistently high inflation will finally begin to ease starting in December.

Banks have been slow to pass on the interest rate increases to borrowers, in a bid to help businesses gripped by fears that financial chaos could be unleashed by sovereign debt woes in Europe, a key Indian export market.

Despite fears of a recession in Europe, the survey showed Indian service providers were more optimistic about the coming year than last month as business expectations saw a rebound.

Tuesday's HSBC Markit Manufacturing PMI for India rebounded in October after it nearly stalled in September, helped by a rise in domestic orders for new business.

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