LONDON, Aug 22 Reuters Euro zone business activity showed surprising strength in August despite firms raising prices, a survey showed, potentially weakening expectations for two more rate cuts from the European Central Bank this year.

However, the recovery was mixed as a strong rebound in the bloc39;s dominant services industry offset a deeper downturn among manufacturers.

HCOB39;s preliminary composite Purchasing Managers39; Index, compiled by SP Global, bounced to 51.2 this month from July39;s 50.2, moving away from the 50 mark that separates growth from contraction.

That confounded expectations in a Reuters poll for a dip to 50.1 and beat even the most optimistic prediction for 50.8.

The rebound in activity came even as firms in the 20country currency union raised prices at a faster pace. The composite output prices index climbed to 52.9 from 52.1.

An unexpected rise in July euro zone inflation, a resilient labour market and steady economic activity could make ECB policymakers cautious.

Having reduced the deposit rate in June, policymakers paused in July although a Reuters poll published last week suggested there would be two additional cuts this year.

A PMI covering the services industry soared to 53.3 this month from 51.9, beating a poll prediction for no change.

While some of that activity was driven by services firms reducing backlogs of work, overall demand improved. The new business index rose to a threemonth high of 51.3 from 50.8.

The manufacturing PMI…