US service sector cools in March; price paid measure highest in 3-1/2 years

* ISM services sector growth slows, PMI falls more than expected to 54.0

* Input prices index surges to 70.7, highest since Oct 2022, amid Middle East conflict and tariffs

* Services employment contracts, diverging from strong private payrolls in March

WASHINGTON, April 6 (Reuters) - U.S. services sector growth slowed in March, while prices paid by businesses for inputs climbed to near a 3-1/2-year high, an early sign that the prolonged war with Iran was boosting inflation pressures. The Institute for Supply Management said on Monday its nonmanufacturing purchasing managers index slipped to 54.0 last month from 56.1 in February. Economists polled by Reuters had forecast the services PMI dipping to 54.9. A reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of U.S. economic activity. The U.S.-Israel conflict with Iran, now in its second month, has boosted global oil prices by more than 50%. The national average retail gasoline price has jumped above $4 a gallon for the first time in more than three years. Economists expect the inflation hit from the war would show in the March Consumer Price Index report scheduled to be released on Friday. Producer prices already increased in February in anticipation of the escalation in the Middle East conflict. The ISM survey's measure of prices paid by businesses for inputs soared to 70.7, the highest reading since October 2022, from 63.0 in February. This gauge had remained elevated, with businesses blaming rising costs from President Donald Trump's broad tariffs, which have since been struck down by the U.S. Supreme Court. But Trump responded by imposing a global tariff for up to 150 days. The survey's measure of supplier deliveries increased to 56.2 from 53.9 in February. A reading above 50 percent indicates slower deliveries. That mirrored a lengthening in delivery times at factories, with manufacturers of food, beverages and tobacco products citing "container delays."

The anticipated inflation fallout from the conflict has greatly diminished the odds of an interest rate cut this year. The Federal Reserve left its benchmark overnight interest rate in the 3.50% to 3.75% range last month. The survey's measure of new orders increased to a two-year high of 60.6 from 58.6 in February. But export order growth slowed considerably and the increase in unfinished work moderated. Services sector employment contracted, with the jobs measure dropping to the lowest level since December 2023. That is at odds with a sharp rebound in job growth in March, which was driven by a 143,000 increase in private service-providing payrolls. The ISM employment gauge has, however, not been a good predictor of private services payrolls in the Labor Department's employment report. (Reporting By Lucia Mutikani; Editing by Chizu Nomiyama)