TOKYO, June 3 (Reuters) - Japan's services sector ground

to a halt in May after more than a year of expansion, as surging

costs linked to the Middle East war dampened service demand and

led to a 12-year high in output price inflation, a private

survey showed on Tuesday.

* The S&P Global final Japan Services Purchasing Managers'

Index (PMI) fell to 50.0 in May from 51.0 in April, marking the

end of a 13-month expansion streak. Readings above 50.0 indicate

growth in activity, while those below point to a contraction.

* New business growth slowed for the third consecutive

month, rising at the weakest pace in nearly two years. In

particular, new export business fell sharply, marking the

biggest drop since March 2022, as subdued external demand and

rising prices weighed on overseas sales.

* Meanwhile, cost pressures intensified sharply. Input

prices rose at the fastest rate in more than three years. The

surge was largely attributed to supplier price hikes for fuel,

energy and raw materials amid the Middle East war, as well as

higher labour costs, according to the survey.

* In response, service providers raised their selling prices

at the fastest pace since April 2014, when a consumption tax

rise to 8% from 5% triggered sweeping price hikes.

* Annabel Fiddes, Economics Associate Director at S&P Global

Market Intelligence, said: "Rising prices have also impacted

demand, especially within the service sector, as households'

budgets have come under greater strain."

* Employment growth slowed to the weakest rate in nine

months. Some firms cited staff retirements and resignations as

factors constraining workforce expansion.

* Business confidence regarding the year-ahead outlook

improved slightly for the second straight month but remained

weaker than the post-pandemic average due to geopolitical

uncertainty, rising costs and demographic challenges, according

to the survey.

* The broader picture showed Japan's Composite PMI, which

includes both manufacturing and services, also fell to 51.1 in

May from 52.2 in April, marking the slowest growth in five

months. The relatively robust manufacturing sector is partly

"boosted by temporary stock building, which is expected to fade

once warehouses are deemed sufficiently stocked and if global

economic conditions remain fragile," Fiddes said.