By Vicki Needham - 10/03/13 04:42 PM EDT
The sector employs 90 percent of all workers, including those at restaurants, hotels and retailers and its fluctuations can signal whether consumers and businesses will increase or pull back their spending.
Consumer spending drives 70 percent of economic activity and is needed to bolster growth.
The measure of sales fell more than seven points to 55.1, indicating much slower growth, a sign that consumers and businesses did reduce their spending.
Hiring also took a big dip, slowing to 52.7 from 57 in August.
The sector has led the way in hiring during the recovery and is expected to continue in that capacity for the foreseeable future.
New orders slipped slightly to 59.6 after eclipsing 60 in August.
Stock markets, already reflecting the frustration of investors from a lack of congressional inaction on the budget, fell on the weaker-than-expected services report.
Financial markets also will have to do without the monthly jobs report from the Labor Department, which has been delayed because of the impasse over a spending bill in Congress.
The report isn't expected to be released until after the government reopens.
Expectations were that the unemployment rate would have dropped to 7.2 percent from 7.3 percent. Jobs growth was likely expected to remain between the long-running average of 150,000 to 200,000.
On Wednesday, a private-sector employment report by ADP showed that employers added 166,000 jobs last month, a bit slower than expected.