A key U.S. manufacturing index posted its most significant gain in five years in August as new orders and factory production both rose, suggesting the ailing industrial sector may have endured the worst of a yearlong slump.

The National Association of Purchasing Management said on Tuesday its monthly manufacturing index rose to 47.9 in August from 43.6 in July, well above economists' forecasts of a 43.9 reading.

A reading under 50 signals manufacturing activity -- more than one-sixth of the overall economy -- is contracting. The NAPM index has held below that level for 13 straight months, but August's reading was the best since November 2000, and the index is solidly above a decade low of 41.2 in January.

The NAPM new orders index, a critical gauge of demand for factory goods in the pipeline, rose to 53.1 in August from 46.3 in July -- suggesting new orders rose for the first time in more than a year.

The NAPM inventories index rose to 37.7 in August from 35.8 in July while the production index rose to 52.2 from 46.4 in July, suggesting that aggressive inventory reduction by firms this year has cleared the way for improved production.