Business activity in the vast services sector picked up in March, beating expectations and pointing to solid momentum across most of the economy, a report showed on Wednesday.

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Analysts said the survey supported the case for another interest rate increase by the Federal Reserve at its next meeting in May.

With interest rates rising to a near four-year high, another report from an industry trade group on Wednesday showed consumers rushed to lock in home loans.

The Institute for Supply Management's services index rose to 60.5 in March from 60.1 in February, as new orders improved and prices paid dropped. That was above Wall Street economists' forecasts for a decline to 59.

U.S. Treasury debt prices were steady at higher levels, while the dollar pared losses. The report lent a firmer tone to major stock indexes, which were also helped by rising technology stocks.

The ISM report "suggests economic momentum remains strong and probably strengthens the Fed's resolve to tighten policy further in May," said Elisabeth Denison, economist at Dresdner Kleinwort Wasserstein.

"We still believe as we go through the second quarter we will see economic growth slow somewhat as the housing market continues to cool. But as of now, the indications are of continued strong momentum," she said.

The services sector makes up about 80 percent of economic activity and includes businesses like restaurants, hotels, hair salons, banks and airlines.

The survey's prices-paid index fell to 60.5 in March from 64.8 in February, while the jobs component fell to 54.6 from 58.2, and new orders rose to 59.5 from 56.2.

"The market was looking for confirmation that there might be a broad slowing of the economy under way, but the data did not reinforce that view," said Tony Crescenzi, chief bond market strategist at Miller Tabak Co.

"In fact, it suggested the slowdown seen in manufacturing was isolated to that sector alone."

The ISM also pointed to signs of stronger global demand, with export orders reaching the highest level in the almost 10-year history of the survey.

While the report did show a dip in employment in March, the labor market is "tight in specialized areas that require some type of specialized training or experience," said Ralph Kauffman, chair of ISM's non-manufacturing services index.

The Federal Reserve is closely watching the low jobless rate, among other signals that the economy is close to full capacity, which could trigger inflationary pressures.

The central bank raised interest rates at its policy meeting last week to 4.75 percent, and economists expect yet another rate rise at the next gathering in May, which would mark the 16th straight increase in the current tightening campaign.

BEATING THE RATE RISE

Separate figures on Wednesday from an industry trade group showed mortgage applications rose for a second consecutive week.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity last week increased 7.2 percent to 612.8 from the previous week's 571.7.

The 30-year fixed-rate mortgage, the industry benchmark, was more than 1 percentage point above its 2005 low of 5.47 percent set in June. The rate's 2005 high was 6.33 percent, reached in November.

Historically low mortgage rates have fueled a five-year housing boom, helping support the economy's recovery from recession despite uncertain business investment.

A third release showed retail sales, excluding cars, were unchanged on a seasonally adjusted basis in March, recovering from a 0.3 percent drop in February, according to preliminary data released by SpendingPulse on Wednesday.

Preliminary seasonally adjusted sales totaled $280.4 billion in March, up 7.4 percent from a year earlier, said SpendingPulse, a retail data service of MasterCard Advisors, an arm of MasterCard International.

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