LONDON (Reuters) - Britain's construction industry shrank sharply last month, with civil engineering declining at the fastest rate since 2020 due to weak orders and a lack of new infrastructure work, according to a survey published on Friday that showed optimism plunged.

There was also concern among firms about the impact of the increase in social security contributions paid by employers, the weak outlook for the economy, and geopolitical uncertainty.

The S&P Global/CIPS UK Construction Purchasing Managers' Index stood at 46.4 in March up from 44.6 in February and slightly above economists' average expectation of 46.0 in a Reuters poll.

Still, the index remained rooted below the 50 dividing line for growth and contraction.

"March data highlighted a challenging month for UK construction companies as sharply reduced order volumes continued to weigh on overall workloads," Tim Moore, economics director at S&P Global Market Intelligence, said.

"A lack of new projects, alongside pressure on margins from rising payroll costs, led to hiring freezes and the non-replacement of departing staff in March."

Total new orders declined for the third month in a row, although at a slower rate than in February with firms citing weak demand and market conditions.

The survey showed just 40% of construction firms expected to see output to rise in the coming 12 months - the weakest in 17 months.

Civil engineering contracted at the sharpest rate since October 2020, during the Covid-19 pandemic, and commercial building fell at the fastest pace since January 2021.

But house-building shrank less sharply than in February when it hit a 57-month low.

Construction firms reported the fastest pace of job shedding in nearly four and half years, attributed to higher payroll costs and business confidence slipped to its lowest since October 2023.

The all-sector PMI, which combines the services, manufacturing and construction industries, rose to its highest since October last year at 51.0 in March from 50.0 in February, thanks to a strong performance from the services industry.

(Reporting by Suban Abdulla; Editing by Hugh Lawson)