Markit's Purchasing Managers' Index of companies in the services sector, which makes up about 70 percent of Spain's economy, fell to 46.5 in July from 50.2 in June. That was its weakest level since December last year and was well below the 50 line that divides growth from contraction. Economists have predicted a marginal fall to 50.0.
Spain is struggling to reassure the markets that it will be able to avoid seeking outside help to manage a debt crisis that saw its financing costs spiral to a new euro-era record high on Tuesday.
The data will worry investors who fear that Spain's economy will not grow fast enough to help reduce its high public deficit.
On Monday, data showed the country's manufacturing sector activity fell faster and for the third straight month. The recent period of stagnation in the Spanish service sector has been broken by a return to falling activity and new business, said Andrew Harket, economist at data provider Markit.