U.S. services activity grows at fastest pace since 2006

NEW YORK (Reuters) - The activity of U.S. service sector grew in March at its fastest pace in almost four years, according to data from Monday, while pending sales of existing homes increased in February, signs of economic recovery is underway.

The Institute for Supply Management (ISM) said its nonmanufacturing index rose to 55.4 last month from a reading of 53.0 in February. The data is located above the 50 level that separates growth from contraction and is the highest since May 2006.

Analysts polled by Reuters had expected a reading of 54.0 for the index in March.

After the data, which reinforced expectations that the economy recovers from recession firm stride, the shares rose on Wall Street, while the dollar halted its losses against the yen.

Other reports last week showed the manufacturing sector grew for the eighth month in March to its highest rate since July 2004. In terms of employment, in March the rate of job creation was the highest in almost three years.

"It seems that good news continues," said Alan Gayle, investment strategist at Ridgeworth Investments in Richmond, Virginia. "All this suggests that economic recovery is being felt in the creation of jobs," he said.

According to a report of the National Association of Realtors, pending sales contracts on previously owned homes unexpectedly rose in February.

Both reports "across the board support the idea that the recovery is progressing," said Tom Porcelli, economist at RBC Capital Markets in New York. "We're moving, there is a better way to define," he said.

The service sector represents about two-thirds of U.S. economic activity and analysts say that growth in this segment is a good omen for consumer spending and jobs in general.

The employment component of the ISM report rose slightly in March, while new orders also increased.

Moreover, the economic research institute Conference Board said the U.S. labor market continued in March the trend towards recovery for the seventh consecutive month, as fewer Americans reported having trouble finding employment.

Economists argue that job creation is essential for sustained economic growth, especially now that government stimulus begin to fade. Despite the reported improvement in the labor market on Friday, the unemployment rate remained at 9.7 percent in March for the third straight month.

(Additional reporting by Corbett B. Daly and Lucia Mutikani in Washington and Camille Drummond, Ryan and Emily Flitter Vlastelica in New York)