U.S. service sector growth fell more than expected in September, according to a report released on Wednesday that painted a mixed picture of the economy, with prices rising but employment improving.

The Institute for Supply Management's services index fell to 54.8 last month from 55.8 in August. Economists polled by Reuters had forecast a median result of 55.0 for September. A number above 50 indicates growth.

This was the lowest headline reading of the ISM's non-manufacturing index since March, but there were signs of strength in the report's details.

Some analysts saw it as a key indicator of sentiment following the recent turmoil in credit markets which emanated from a crisis in subprime mortgages, where delinquencies have risen among home loans extended to higher-risk borrowers.

"ISM is the first clean data post the subprime mess and it shows that the service side of the economy is holding up," said Tom Sowanick, chief investment officer at Clearbrook Financial LLC in Princeton, New Jersey, adding:

"Though the number declined month-over-month, the employment component rose, suggesting that sentiment may be improving."

The survey raised concerns over inflation, with the prices paid index rising to 66.1 in September from 58.6 in August, for the highest since May's 66.4 peak.

The employment index firmed to 52.7 from 47.9, which could raise expectations for a solid outcome in the government's U.S. September jobs report due on Friday.

The new orders index slipped to 53.4 from 57.0 in August.

U.S. stocks briefly pared the day's losses after the ISM services report, while the dollar rose versus the yen. Government bonds, which usually benefit from signs of economic weakness, fell, as the prices and employment readings weighed on sentiment among fixed income investors.

The services sector represents about 80 percent of U.S. economic activity, including businesses such as restaurants, hotels, banks and airlines.