Euro zone business activity made a surprise return to modest growth in January, adding to signs the downturn in the bloc may not be as deep as feared and that the currency union may escape recession, a survey showed.

S&P Global's flash Composite Purchasing Managers' Index (PMI), seen as a good gauge of overall economic health, climbed to 50.2 this month from 49.3 in December.

January was the first time the index has been above the 50 mark, which separates growth from contraction, since June and the reading was ahead of the median Reuters poll forecast of 49.8.

"The survey undoubtedly brings welcome good news to suggest that any downturn is likely to be far less severe than previously feared and that a recession may well be avoided altogether," said Chris Williamson, chief business economist at S&P Global Market Intelligence.

A mild winter so far, falling gas prices and recent positive economic data meant some quarterly growth forecasts in a Reuters poll published on Monday were upgraded although a technical recession was still predicted.

In a sign they are growing more optimistic, firms increased headcount at a faster rate this month. The employment index rose to a three-month high of 52.5 from 51.9 in December.

The PMI covering the bloc's dominant services index also surprised to the upside, coming in at a six-month high of 50.7. It was at 49.8 in December and the Reuters poll had a forecast for 50.2.

Despite consumers facing large bills, demand only waned slightly. The new business index was just shy of the breakeven mark at 49.8, up from 48.4.

"The region is by no means out of the woods yet, however, as demand continues to fall – merely dropping at a reduced rate," Williamson said.

Factory activity also showed an improvement but did still decline. The manufacturing PMI rose to 48.8 this month from 47.8, ahead of the 48.5 Reuters poll forecast.

An index measuring output which feeds into the composite PMI bounced to a seven-month high of 49.0 from 47.8.

Like in the services PMI, the input prices index fell but firms raised their charges at a faster rate. The output prices reading nudged up to 61.4 from 61.2 but was still far lower than it has averaged over much of the last three years.

As it continues its battle against still high inflation the European Central Bank will deliver 50 basis point interest rate rises at each of its next two meetings, according to a Reuters poll.

Although the euro zone's central bank has been raising rates at its fastest pace on record, it has so far failed to bring inflation anywhere near its 2% target.

(Reporting by Jonathan Cable; Editing by Susan Fenton)