NEW YORK - The U.S. dollar slipped against a basket of currencies on Friday, after data showed U.S. business activity contracted for the first time in nearly two years in July as a sharp slowdown in the service sector outweighed continued modest growth in manufacturing.

S&P Global on Friday said its preliminary - or "flash" - U.S. Composite PMI Output Index had tumbled far more than expected to 47.5 this month from a final reading of 52.3 in June.

With a reading below 50 indicating business activity had contracted, it is a development likely to feed into a vocal debate over whether the U.S. economy is back in - or near - a recession after rebounding sharply from the downturn in early 2020 at the start of the COVID-19 pandemic.

Against a basket of currencies, the dollar was 0.34% lower at 106.25.

The data reflects a hit to sentiment, similar to that seen elsewhere around the globe, Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto, said.

"That's a reflection of tighter financial conditions and also the fact that inflationary pressures remain elevated," Rai said.

Rai, however, said he wasn't reading too much into the dollar's weakness on Friday.

"Even if the U.S. economy does slow down somewhat I don't think you can extrapolate some sort of medium term dollar weakness ... because we are seeing similar things elsewhere," he said.

Overall activity in the euro zone shrank due to an accelerating downturn in manufacturing and a near-stalling of service sector growth, with inflation pushing consumers to cut back spending, S&P Global's Composite Purchasing Managers' Index, a good gauge of economic health, showed.

The euro was 0.1% higher against the dollar at $1.02445.

The dollar's weakness helped prop up the British pound, even as data showed Britain's businesses grew at their slowest pace in 17 months in July, fuelling concerns about a slowdown in a UK economy that is grappling with inflation at a four-decade high. The pound was 0.28% higher at $1.2038.

The Australian and New Zealand dollars were headed on Friday for their best week in several months, buoyed by a more positive market mood. The risk-sensitive Australian dollar was 0.43% higher at $0.6959, up 2.4% for the week, while the kiwi was 0.46% higher at $0.62815, up 2.0% for the week.

In cryptocurrencies, bitcoin was about 1.43% higher at $23,493.62, on pace to finish the week up 13%, as traders bet the recent bout of weakness that had engulfed the market was over.

(Reporting by Saqib Iqbal Ahmed, Editing by William Maclean)