April 4 (Bloomberg) -- U.S. service industries grew at the slowest pace in almost four years in March, leaving the economy more exposed to slumps in manufacturing and housing.

The Institute for Supply Management's index of non- manufacturing businesses including banks, builders and retailers slid to 52.4, lower than economists anticipated. Orders placed with American factories rose 1 percent in February, the Commerce Department said in Washington, also less than analysts predicted.

Services, which account for 90 percent of the economy and have propped up growth for the past year, are now being hurt by rising fuel costs and slowing sales. Bonds rallied and the dollar retreated after the numbers

``We're in a very uncomfortable place right now,'' said Cary Leahey, senior economist at Decision Economics Inc. in New York. ``Not only are things more uncertain, but the risks of slower growth have gone up.''

Climbing costs also make it tough for the Federal Reserve to respond to weakness in the economy by cutting interest rates. Traders' attention will now shift to the Labor Department's monthly jobs report on April 6, which economists predict will show a pick up in employment.

The yield on the benchmark 10-year Treasury note fell to 4.65 percent at 3:13 p.m. in New York, from 4.67 percent late yesterday.

Business `Off'

``Definitely business is off, but it's not gloom and doom out there,'' Anthony Nieves, chairman of the ISM survey committee, said on a conference call. Readings above 50 mean the industry is still expanding.

FedEx Corp., the world's largest air-cargo carrier, is among service providers getting pinched. On March 21, the Memphis, Tennessee-based company reported its first quarterly profit decline in three years and cut its earnings forecast for this quarter citing slowing economic growth. The slowdown is hurting its Express parcel delivery and Freight trucking units.

The situation in Europe is less bleak. Royal Bank of Scotland Group Plc's services index slipped to 57.4 last month from February's six-month high of 57.5, a report today showed.

The ISM index was forecast to rise to 55, according to the median estimate in a Bloomberg News survey of economists. Factory orders were forecast to increase 1.8 percent. Excluding transportation equipment, bookings fell 0.4 percent after a 2.5 decline the prior month.

Orders Slow, Prices Rise

The ISM's report showed the index of new orders fell to a seven-month low of 53.8 and a measure of prices paid rose to 63.3, the highest since August. The report also showed hiring cooled to an almost three-year low.

``Business sentiment is weakening,'' said Kevin Logan, senior market economist at Dresdner Kleinwort in New York. ``Sales are slowing, and businesses are looking out and seeing that it's going to be harder to make money.''

Monster Worldwide Inc., owner of the world's largest Internet job-listing site, said today first-quarter sales rose less than forecast as demand slowed in the U.S.

The slowdown in services last month confirmed a similar weakening in manufacturing. ISM's factory index, out earlier this week, showed activity slowed while raw-materials costs jumped, adding to concerns that a cooling economy is failing to damp inflation.

Growth Forecasts

The economy grew at an annual rate of 2.5 percent in the fourth quarter, revised figures from the Commerce Department showed last week. Growth this quarter may be 2.4 percent, according to the median estimate of economists surveyed by Bloomberg News from March 1 to March 7.

Fed Chairman Ben S. Bernanke, reiterating his forecast for ``moderate'' growth, told lawmakers last week that the weakness in housing and some parts of manufacturing so far ``does not appear to have spilled over to any significant extent to other sectors of the economy.''

Mounting defaults on subprime mortgages, loans to people with limited or poor credit histories, may throw more properties onto the market and weaken prices further, economists said. Since the start of 2006, more than 30 lenders have halted operations, gone bankrupt or sought buyers as defaults on subprime mortgages surged last year.

New Century Financial Corp. this week became the biggest subprime mortgage company to go bankrupt after the lender was overwhelmed by customer defaults. The Irvine, California-based company filed for Chapter 11 protection on April 2.

So far, consumer spending is holding up. Both incomes and spending in February gained 0.6 percent, more than forecast, Commerce Department data showed last week. Consumer spending accounts for more than two-thirds of the economy.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

Last Updated: April 4, 2007 15:46 EDT