Business activity in Britain's services sector fell last month for the first time since January as higher interest rates reduced consumer and corporate demand, a survey showed on Tuesday, although the drop was less than initially estimated.

The S&P Global/CIPS Purchasing Managers' Index (PMI) for Britain's services sector dropped to 49.5 in August from 51.5 in July - a seven-month low but above an initial estimate which showed it matching January's two-year low of 48.7.

The broader composite PMI - which also includes Friday's very weak manufacturing PMI - dropped to 48.6 from 50.8, again the lowest since January but revised up from an estimate of 47.9 for August, which was the lowest since January 2021.

"Service providers saw customer spending reverse course during August as higher borrowing costs, subdued business confidence, and stretched household finances all acted to curtail sales opportunities," Tim Moore, economics director at S&P Global, said on Tuesday.

Backlogs of work fell by the most in more than three years as fewer orders came in, and businesses responded by hiring staff at the slowest rate in five months.

When the initial estimate was published on Aug. 23, S&P Global said it pointed towards a 0.2% contraction for Britain's economy in the three months to September. The latest readings are still below the 50 level which separates growth from contraction.

Earlier on Tuesday, Barclays reported a slowdown in consumer spending growth in August, which it said was partly due to unusually wet summer weather as well as the broader cost-of-living squeeze.

"Key data to watch in the coming months will be the extent to which weaker employment trends and softer demand translate into falling domestic inflation," Moore said.

British consumer price inflation was 6.8% in July - down from a peak of 11.1% in October 2022 but still higher than in any other major economy. Financial markets expect the Bank of England to raise interest rates this month to 5.5% from 5.25%, the 15th increase in a row, before a peak of 5.75% this year.

The PMI showed that services companies raised prices in August at a rapid pace by historic standards, but one which was nonetheless the slowest in two years, as their costs rose at the joint-lowest rate since May 2021.

Wages and energy bills were the commonest sources of cost increase, but some firms also noted lower raw material costs.

(Reporting by David Milliken; Editing by Hugh Lawson)