The services sector showed signs of expansion last month for the first time since the end of 2002, according to the latest NCB Purchasing Managers' Service Index.

The research shows that activity within services firms rose sharply in June after declining in each of the previous three months.

NCB senior economist Mr Eunan King said services firms had received a fillip from the conclusion of the the war in Iraq and an easing in fears about SARS.

"Business confidence held at a high level and this month was given substance by a rise in incoming business," he added.

The overall services index recorded a value of 50.2, up from 47.5 in May, when optimism about future business sank to a 19-month low. A rate below 50 signals contraction.

Firms surveyed last month reported that persistent efforts to promote services had helped them to win contracts and logged a high level of confidence about picking up future business.

They suggested that improving economic conditions in key markets could be linked to a lift in customer sentiment.

Employment levels remained under pressure, however, with firms cutting staff, albeit slightly, for the 12th successive month in an effort to deal with faltering market conditions.

Companies surveyed also reported heightened pressure on costs, citing wage expenses in particular. Margins were squeezed as the charges levied in the services sector fell at the sharpest rate recorded for three years.

All service sectors reported growth in activity last month with the exception of technology, telecoms and media (TMT) firms, which were hit by problems in securing new contracts.

The sharpest expansion came in business services, with firms in the area signalling growth for the 10th consecutive month.

Marginal expansion was recorded in financial services, while seasonal factors boosted activity within transport, travel, tourism and leisure companies.

Optimism picked up in all sectors, with TMT firms most positive about growing their businesses over coming months.