The key U.S. services sector (search) expanded sharply in June to its highest level since September 2000 as the economy looks to get back on an even keel after being destabilized by the U.S.-led war in Iraq.

The Institute for Supply Management (search) said Thursday its index of non-manufacturing activity jumped to 60.6 in June from 54.5 in May. Economists polled by Reuters had forecast a rise to 55.0, in a range of 52.5 to 56.5.

A reading above 50 in the ISM index shows growth in businesses that range from tourism to banking and represent about 80 percent of the U.S. economy.

On Tuesday, an ISM report showed the U.S. manufacturing sector (search) continued to contract in June, albeit at a slower rate.

But monthly activity in the services sector has contracted only once in the last 17 months -- in March 2003, as the U.S. kicked off its war in Iraq.

"It looks like the service sector side of the economy is doing better," said Gary Thayer, chief economist at AG Edwards & Sons in St. Louis.

"The service sector may begin to generate some jobs in the second half of the year. I think we could be seeing better employment numbers down the road," Thayer said.