Service sector activity grew at its fastest pace in nearly two years in August, according to the latest figures from the Purchasing Managers' Index, boosting hopes that the recession may soon be over.

The index on business activity in the service sector rose to 54.1 in August, from 53.2 in July, the highest since September 2007 and beating forecasts for a reading of 53.9.

The data has particular importance due to the heavier weighting of the services sector in Britain.

Official data have also suggested things are looking up, with revised figures last week showing the economy shrank by 0.7 percent between April and June, less than the 0.8 percent contraction originally pencilled in and a vast improvement on the 2.4 percent decline in the first three months of this year.

"The latest services data leave the UK economy on track for growth in Q3, although there will remain doubts over the sustainability of expansion," said Markit economist Paul Smith.

Almost a quarter of firms polled said activity increased in August, partly due to a rise in new orders, with the new business index holding near July's 16-month high, the survey showed.

And firms were their most optimistic about the prospects for the coming year than since the onset of the credit crunch, with the business expectations index rising to 72.3 from 69.3, its highest since August 2007.

However, many firms had to cut prices to encourage demand even as their costs rose -- the input prices index was its highest since November, while the prices charged index fell almost two points from July.

Businesses shed jobs at their slowest pace in almost a year, according to the survey, but rising unemployment means any economic recovery is likely to be weak.

"With unemployment set to continue to rise over the coming months, and the support from monetary and fiscal stimulus fading, a muted recovery of the UK economy remains the most likely scenario at the present time," Smith said.