Feb. 5 (Bloomberg) -- Expansion in European service industries, the biggest part of the economy, unexpectedly accelerated in January after unemployment fell to the lowest on record.

Royal Bank of Scotland Group Plc's services index, based on a survey of purchasing managers in industries from banking to airlines, rose to 57.9 from 57.2 in December. A reading above 50 indicates expansion. Economists expected the index, compiled by NTC Economics Ltd., to fall to 56.8, according to the median of 36 estimates in a Bloomberg News survey.

``Services have entered the year with plenty of momentum,'' said Madeleine de Villiers, an economist at Capital Economics in London. ``The recovery really has spread; we've seen considerable improvement in the labor market.''

Today's report suggests companies are confident growth will rebound from a slowdown at the start of the year after Germany and Italy raised taxes. Unemployment in the euro region fell to 7.5 percent in December, the lowest since the data were first collated in 1993, as exports encouraged hiring.

``Employment is the key,'' said Jose Carlos Diez, chief economist at Intermoney SA in Madrid. When employment gains, ``incomes increase and then consumption will grow.''

`Maintain Momentum'

Services growth accelerated in Germany, Italy and France, today's report showed. A gauge of business expectations for the 13-nation euro region jumped to 67.8 from 65.3.

Growth at U.S. service industries also accelerated last month, the Institute for Supply Management said today, with its index of non-manufacturing businesses increasing to 59.0 from 56.7 in December.

``The environment is benign, both in the global economy and in the world's financial markets,'' Deutsche Bank AG Chairman Josef Ackermann said Feb. 1. ``If we don't run into any headwinds, we are confident that we can maintain our current growth momentum.''

Still, in the U.K. services growth slowed in January, a separate report showed. An index of growth based on responses from about 700 companies fell to 59.2 from 60.6 in December.

The pace of Europe's economic expansion will probably moderate this year after tax increases in Germany and Italy and as borrowing costs rise. Germany, Europe's largest economy, on Jan. 1 increased value-added tax, a levy on sales, to 19 percent from 16 percent to help reduce its budget deficit.

Euro-region growth will probably slow to 2.2 percent this year from 2.6 percent in 2006, which was the fastest pace since 2000, according to the Organization for Economic Cooperation and Development.

Manufacturing

The euro's 9 percent gain against the dollar since the start of last year is also hurting some European companies with business outside of the single currency region. Deutsche Telekom AG, Europe's largest telephone company, cut its forecast for profit this year as the currency's appreciation erodes U.S. revenue.

Europe's manufacturing expansion slowed for a third month in January after the euro's increase made exports less competitive, another Royal Bank of Scotland survey showed last week. Its index of manufacturing sentiment fell to 55.5 from 56.5 in December.

``Activity on the services side remains relatively strong,'' said Frederic Pretet, an economist at Societe Generale in Paris. ``The point of nervousness for the European Central Bank is the development in the price component. This is a further argument for them to continue normalizing monetary policy.''

ECB Rates

A gauge of input price growth rose to 60.3 from 57.5 while a measure of prices charged increased to 54.0 from 52.7, today's report showed.

The ECB raised its benchmark interest rate for the sixth time in a year in December, to 3.5 percent, to contain inflation as the economy expands. Investors are betting the central bank will raise the rate at least once more this year, with an increase to 3.75 percent expected in March, futures trading indicates.

Bundesbank President Axel Weber, who sits on the ECB's governing council, said in an interview Feb. 3 that German wage increases need to remain ``moderate'' even though the economy may grow faster than expected this year.

To contact the reporter on this story: Ben Sills in Madrid at bsills@bloomberg.net

Last Updated: February 5, 2007 10:33 EST