UPDATE: UK Sep Services Rise Fuels 3Q GDP Growth Hopes

LONDON -- The U.K.'s dominant services sector expanded for the fifth straight month in September, reaching the highest level in over two years, propelling service sector performance in the third quarter to the strongest level since the third quarter of 2007, data showed Monday.

Research group Markit Economics and the Chartered Institute of Purchasing & Supply said the services PMI rose to 55.3 in September from 54.1 in August. The unexpected size of the increase compares with economists' forecast of a rise to 54.4, according to a Dow Jones Newswires survey.

A reading above 50.0 indicates the sector is expanding, while a reading below 50.0 indicates it is contracting.

The survey reports that the pickup in growth appears to be sustainable, with confidence in the sector reaching a nearly two-and-a-half year high.

"The continued acceleration of services growth is particularly welcome following weaker-than-expected PMIs for the manufacturing and construction sectors in September," said Paul Smith, senior economist at Markit. "A combined PMI output index for these three sectors held steady in September, and remains supportive of a small rise in gross domestic product for the third quarter."

Markit and the CIPS reported that firms reported a rise in demand, in line with the improving economic climate.

Despite the strength of business confidence across the service sector, the index also reported that backlogs of work were reduced in September, largely due to continued excess capacity. As a result of this, there were further job cuts in September resulting in the 17th straight month of job reductions in the service sector.

CIPS Chief Executive David Noble commented that while there is strong evidence that the services sector is "bouncing back" the picture of health is not a consistent one across the whole sector.

"Though we're starting to see a turnaround in the hospitality sector, some sub sectors - such as transport and storage - are still in decline," he said. "With this in mind, prudence is at the forefront of many purchasing managers minds," Noble said.

Economists are also warning that, despite the strength of business confidence reported in the survey, the sustainability of the current pick up remains questionable.

"The official data from the Office for National Statistics has recently come out rather weaker than the surveys suggested, so a smaller rise than this is probably likely," said Vicky Redwood, U.K. economist for Capital economics. "Whats more, we continue to have our doubts about how strong any further recovery will be," she said.