TOKYO Japan's factory activity shrank for a third straight month in August amid higher oil prices and uncertainty over the global economic outlook, although the pace of decline slowed, a private sector survey showed on Wednesday.

The au Jibun Bank flash Japan manufacturing purchasing managers' index (PMI) edged up to a seasonally adjusted 49.7 in August from 49.6 in July. The index remained below the 50.0 index point threshold, which separates contraction from expansion.

Output and new orders in the manufacturing sector shrank for a third straight month in August but at a slower pace than the previous month. Employment was unchanged, snapping 28 straight months of expansion.

"Rising oil prices were a key feature across the latest survey, with firms across both manufacturing and services reporting an impact on input costs," said Andrew Harker, economics director at S&P Global Market Intelligence, which compiled the survey.

"Another area of common ground across the two monitored sectors was with regards to business confidence, which waned across the board amid concerns around longer-term economic conditions."

Input prices rose at the fastest pace in three months, with firms citing higher crude oil prices. But output price inflation eased to the weakest in about two years.

The au Jibun Bank flash services PMI expanded to a seasonally adjusted 54.3 in August, the highest in three months. The expansion was buoyed by solid gains in new orders, and new business from abroad also grew.

Japan's core consumer prices rose 3.1% in July, holding above the central bank's 2% inflation target for the 16th straight month.

The au Jibun Bank Flash Japan composite PMI, which combines both manufacturing and service sector activity, was at 52.6 in August from 52.2 in July. The bullish service sector drove the overall expansion, offsetting the soft manufacturing sector.

(Reporting by Kaori Kaneko. Editing by Sam Holmes)