WEAK manufacturing figures and strong service sector numbers yesterday highlighted the dilemma facing the Bank of England's monetary policy committee - which is expected to raise UK interest rates by a quarter-point to 3.75% at noon today.

Figures from National Statistics showing an unexpected 0.2% fall in UK manufacturing output between August and September reduced further the already slim chances that the MPC would move by a bolder half-point to cool consumer exuberance.

Jonathan Loynes, at Capital Economics in London, said yesterday of the manufacturing numbers: ''It is a warning that some parts of the economy are still pretty soft, pretty fragile. I think it was just a bit of a warning again to proceed with care, and I think it has probably dampened the chances, if there were any, of a 50 basis-point (half-point) increase tomorrow.

''I think most things point to a quarter. I guess there is some possibility of nothing and there is some possibility of 50 (basis points).''

City economists and business organisations yesterday urged the MPC not to move base rates too high too soon, while conceding the inevitability of a quarter-point rise today from a 48-year low of 3.5%. This would be the first increase since February 2000.

A survey from the respected Chartered Institute of Purchasing and Supply yesterday showed the UK service sector growing at its fastest rate since November 1999. The composite business activity index rose from 58.7 in September to 59.1 last month. A figure higher than 50 signals growth.

Service sector employment increased for the third month running.

Four members of the MPC voted last month for a quarter-point rate rise, although the other five carried the day with no change.

The economic statistics since have been strong. Halifax, the UK's biggest mortgage lender, yesterday said house prices rose by 1.2% last month.

Stephen Nickell was one of the MPC members who voted for a rate rise last month.

Asked last week by The Herald if a half-point increase might be warranted, he signalled it would not with the reply: ''I think, during this period, caution is the order of the day. If one of the issues is confidence and so on, I think that would militate against any big changes.''

The Confederation of British Industry yesterday published a survey showing smaller manufacturers had seen orders fall at their fastest rate in two years in the last quarter.

Digby Jones, its director-general, said: ''If the Bank chooses to raise interest rates (today), the move must represent the reversal of July's precautionary cut, and not break the dam on interest rates by signifying a series of quick rate rises.''

Jeremy Peat, chief economist at Royal Bank of Scotland, thought a quarter-point rise today would be right for the current ''complex'' economic circumstances.

He said: ''We have a decline in manufacturing at the UK level in both August and September, and the level of output in manufacturing is still less than it was 12 months ago. We still have got very much a two-tier economy in the UK. The Bank of England is understandably concerned about the housing market and consumer indebtedness.''

The City had expected a 0.5% rise in manufacturing output during September.

While he considered it ''understandable'' that the MPC wanted to take heat out of the housing market, Loynes expressed fears that a ''reckless'' half-point rate rise would send sterling ''through the roof'' and ''snuff out recovery on the industrial side before it gets going''.