Britain looks more firmly on track for a modest recovery after services firms' business unexpectedly gathered pace in March, reducing further the chances of another injection of cash by the Bank of England this year.

The economy has not recovered fully from the 2007-2009 slump, and fears of a renewed recession had been stoked by a contraction in the final three months of last year, caused in part by the escalation of the euro zone debt crisis.

But the rise on Wednesday in the Markit/CIPS Purchasing Managers' Index (PMI) for the services sector to 55.3 from February's 53 - combined with surprise improvements in construction and manufacturing earlier in the week - points to solid growth.

What's particularly encouraging is that this revival of business confidence is encouraging firms to take on more staff, said Chris Williamson, chief economist at survey compiler Markit.

The PMI reading confounded analysts' forecasts for a dip in the index to 53.4, taking the index further above the 50 mark which signals growth in activity.

The rebound in the three PMI business surveys suggested that the economy grew by as much as 0.5 percent in the first quarter, Williamson said.

Sterling rose to a two-week high versus the euro and pared losses against the dollar in the wake of the services data.

The business surveys indicated that the economy entered the second quarter with reasonable momentum, economists said, though most warned against the bumpy road ahead.

The last five years have shown that downside risks predominate, said Investec economist Philip Shaw. But the news this week has been as good as anyone could have hoped realistically.

Adding to the positive news, mortgage lender Halifax said house prices rose 2.2 percent in March, against forecasts for a dip, raising hopes that the housing market - once a springboard for consumer spending - is at least stabilising.


Consumers have taken a hammering from a combination of the government's tough measures to reduce the budget deficit, rising prices that outpace growth in wages, and the relatively higher cost of credit from banks compared to previous years.

While the government has set out to rebalance the economy towards manufacturing and exports, the health of the service sector is key, as it accounts for three quarters of the economy.

The sector, ranging from banks and telecommunication firms to restaurants and hotels, shrank in the final quarter of 2011, but returned to growth in January.

Service firms' confidence about the year ahead stayed near February's level which was the highest in a year, and firms planned to add staff to meet the increase in new business.

With unemployment still at its highest since the mid-1990s, signs for more hiring from all three PMI surveys provide welcome news for the Bank, which forecasts that consumers will spend more later this year when inflation falls ease the pressure on their budgets.

A release from the British Retail Consortium showed that prices for non-food products fell at their fastest annual pace in nearly two-and-a-half years in March, pointing to easing underlying inflation pressures. However, food price inflation picked up, highlighting the risk to the Bank's forecast that inflation will fall below 2 percent later this year.

The Bank launched a second round of quantitative easing asset purchases in October, and sanctioned another 50 billion pounds in February. But most economists do not expect more stimulus once the current round of purchases ends in May.

(Additional reporting by Olesya Dmitracova and David Milliken; editing by Patrick Graham)