A key index of U.S. manufacturing activity shrank again in December, though not as much as expected, raising the prospect that the struggling sector is well on its way to clawing out of a 17-month slump deepened by the Sept. 11 attacks.

The Institute for Supply Management's monthly Purchasing Managers' Index rose to 48.2 in December from 44.5 in November, above economists' expectations of a 45.5 reading, extending a rebound from a 10-1/2 year low of 39.8 in October.

A reading under 50 indicates the sector — about one-sixth of overall U.S. economic activity — is contracting. The index has held below that watershed since August 2000, marking the most severfacturing slump since the 1990-1991 recession.

But the report offered hopeful signs. The New Orders Index, a crucial gauge of pipeline demand for factory goods, rose to 54.9 in December — its highest since April 2000 — from 48.8 in November. With factories now receiving rising orders for goods while inventories are slim, increased production may follow in coming months.

The ISM, formerly the National Association of Purchasing Management, compiles its index from surveys of purchasing and supply executives in over 400 companies in about 20 industries.

Reuters and the Associated Press contributed to this report.