* China services sector growth picks up * Legal challenge for LME, Goldman on aluminium storage * Coming up: U.S. ISM non-mfg PMI for July at 1400 GMT By Harpreet Bhal and Melanie Burton LONDON/SINGAPORE, Aug 5 (Reuters) - Copper prices edged lower on Monday, following strong gains last week, after service sector data from China failed to lift expectations for demand in the world's top consumer of metals. Three-month copper on the London Metal Exchange was at $6,984.25 a tonne at 0947 GMT, down 0.3 percent from a close of $7,005 a tonne on Friday, when it hit a one-week high of $7,079 in intraday trade. Copper prices closed up for the first week in three on Friday, by 2 percent, but are facing losses of 12 percent on the year. Activity in China's services sector expanded modestly in July, a private survey showed, as new business orders recovered from a multi-year low in a rare sign of resilience. "The data out of China has provided some reassurance that demand is not dropping off a cliff, but there are still some significant concerns about the Chinese economy and the knock-on effect for metals demand," said Ross Strachan, an economist at Capital Economics. The show of strength in the data was tempered by a fall in prices charged by companies, suggesting demand was still too weak for firms to raise prices, which hit a nine-month low in July. "Growth is in general coming in line with expectations, and expectations have softened over the last six months, so we are getting a downwards trend," Alexandra Knight of National Australia Bank in Melbourne said. "The Chinese government came out and said there would be a floor under growth, so that will help limit any potential downside to copper. Generally we are seeing improvements in the U.S. economy, so it's not all doom and gloom, but we're in for a soft patch for the next few months," she added. Market direction is likely to be dictated by further data from China this week, which is expected to confirm that the economy is still shifting down but is not about to come to a screeching halt. The latest data showed copper inventories in warehouses monitored by the Shanghai Futures Exchange rose 1.2 percent from last Friday. The most-traded November copper contract on the Shanghai Futures Exchange rose 0.3 percent to close at 50,180 yuan ($8,200) a tonne. "The arbitrage between Shanghai and LME prices appears to have fallen, which could be bearish for Chinese July preliminary import data released this Thursday," analysts at ANZ said. In industry news, Ormet Corp. will slash output at its Hannibal, Ohio aluminium smelter to a third of capacity within two weeks and may stop production altogether as it struggles with soaring power costs and weak aluminium prices. The London Metal Exchange and Goldman Sachs Group Inc. have been named as co-defendants in a U.S. class-action lawsuit alleging anticompetitive behaviour in aluminium warehousing, Hong Kong Exchanges and Clearing Limited (HKEx) said. London commodities broker Marex Spectron is in talks to buy JPMorgan's metals storage unit, the Times of London reported. Metal Prices at 0955 GMT Comex copper in cents/lb, LME prices in $/T and SHFE prices in yuan/T Metal Last Change Pct Move End 2012 Ytd Pct move LME Alum 1807.50 -1.50 -0.08 2073.00 -12.81 LME Cu 6982.25 -22.75 -0.32 7931.00 -11.96 LME Lead 2126.50 5.50 +0.26 2330.00 -8.73 LME Nickel 13956.00 61.00 +0.44 17060.00 -18.19 LME Tin 20975.00 -150.00 -0.71 23400.00 -10.36 LME Zinc 1866.00 0.00 +0.00 2080.00 -10.29 SHFE Alu 14240.00 -10.00 -0.07 15435.00 -7.74 SHFE Cu* 50360.00 120.00 +0.24 57690.00 -12.71 SHFE Zin 14610.00 90.00 +0.62 15625.00 -6.50 ** Benchmark month for COMEX copper * 3rd contract month for SHFE AL, CU and ZN

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