Last checked at 
* Services PMI rises to 62.5, highest since May 1997
* Composite PMI suggests 1.3 pct quarterly GDP growth
* EC ups UK forecast, BoE to review outlook next week
* BRC says UK retail sector reports only modest growth (Adds European Commission and NIESR growth upgrades, market andanalyst reaction, retailers' results)
By David Milliken
LONDON, Nov 5 (Reuters) - Britain's services sector expandedat its fastest rate since May 1997 last month, raising theprospect of another big jump in economic growth in the finalthree months of 2013.
A closely-watched industry survey released on Tuesday easilybeat forecasts, while the European Commission and a leadingthink tank revised up their forecasts for UK growth. That makesit more likely the Bank of England will do the same next week,bringing higher interest rates closer into view.
Living standards - a big political battleground - have yetto benefit, however. Retail sales data were lacklustre andcompany results showed shoppers favouring cheaper stores.
Financial data company Markit said its services purchasingmanagers' index (PMI) jumped to 62.5 in October from September's60.3, confounding economists' forecasts for a fall to 59.8.
Markit said that, combined with strong manufacturing andconstruction PMI surveys, the reading suggests quarterlyeconomic growth of 1.3 percent, up from 0.8 percent between Julyand September.
"The UK economic recovery moved up a gear again in October,"said Chris Williamson, chief economist at Markit.
Sterling rose to a four-week high versus the euro and British government bond prices fell.
"Momentum particularly in the domestically-exposed servicessector is stronger than we expected just a few months ago," saidJens Larsen, chief UK economist at Royal Bank of Canada.
"We expect that the (BoE's) forecast will be similarlyaffected, with a stronger growth profile and a more rapid fallin unemployment compared to their August forecast," he added.
The British central bank pledged in August not to raiseinterest rates before unemployment falls to 7 percent, somethingit expected would take more than three years. Many economiststhink that timescale will be brought forward when it publishesfresh forecasts next week.
Larsen said upward revisions to growth were likely to besmaller than implied by the PMIs, which slightly overstatedgrowth in the third quarter. He predicted a 0.8 percentexpansion in the final quarter of 2013.
UPSIDE SURPRISES
Britain looked on the verge of its third recession in fiveyears in early 2013, but the economy has since provedsurprisingly strong. Markit's composite PMI, spanning theeconomy, is at its highest since records began in 1996.
That contrasts with weakness in the euro zone, where lastweek unemployment hit a record high and inflation tumbled,raising chances of a European Central Bank interest rate cut.
On Tuesday, the European Commission sharply raised itsforecast for UK growth next year to 2.2 percent but cut its eurozone forecast to 1.1 percent.
Total UK output is still well below its 2008 peak, however.
Markit's survey showed service sector employers hiring staffat the fastest rate since May 1997, while its overall employmentindex was higher than at any time since its January 1998 debut.
The National Institute of Economic and Social Researchthink-tank said unemployment would hit 7 percent in early 2016,but that the BoE might raise rates before then if consumerspending and house prices rise strongly.
PUBLIC SECTOR AND CONSUMERS UNDER PRESSURE
Markit's surveys do not cover the UK public sector - wheremore cuts to jobs and spending are planned as part of thegovernment's austerity programme - or British retailers, whichhave had mixed fortunes due to falling disposable income.
The British Retail Consortium, which represents largerchains, said its members experienced annual sales growth of 2.6percent in value terms in October, slower than over the summer.
Fortunes vary between retailers. Budget clothing chainPrimark reported a 44 percent rise in profit, whilepricier Marks & Spencer reported a ninth consecutivequarter of falling clothes sales.
Prospects for the rest of the services sector appearbrighter. The services PMI's new orders component was at itsstrongest since the survey started in July 1996.
Some firms cited growing activity in Britain's propertymarket, where the government has announced several measuresaimed at boosting construction and home purchases.
There were also signs of future inflation pressure. Firmsreported they were reaching capacity constraints, with backlogsof work rising at the fastest rate since May 1997, and that theywere raising salaries as well as hiring more staff.
Input costs grew the most in eight months, while pricescharged to consumers rose at their fastest since May 2011. (Editing by Catherine Evans)
