New orders for durable goods rose for the third straight month in February as businesses rebuilt inventories by the largest margin in more than a year, pointing to continued strength in manufacturing.

The Commerce Department said on Wednesday orders for long-lasting manufactured goods rose 0.5 percent last month and January's figures were revised sharply upward to show a 3.9 percent increase.

Markets had expected orders to gain 0.7 percent in February from the previously reported 2.6 percent rise.

This shows the strength in the manufacturing sector. You already created manufacturing jobs in January and February. We are at the cusp of creating jobs in the rest of the economy, said John Canally, economist at LPL Financial in Boston.

U.S. stock index futures slightly trimmed losses after the report, while government debt prices held steady at lower levels. The U.S. dollar rose to a session high against the yen.

Manufacturing is leading the economy's recovery from the worst downturn in seven decades as businesses rebuild inventories, which had been liquidated to record levels to cope with subdued demand.

Durable goods inventories rose 0.3 percent, the biggest gain since December 2008, after rising 0.1 percent in January.

Orders were likely lifted by sturdy aircraft bookings, which offset another decline in orders for motor vehicles and parts. Non-defense aircraft orders rose 32.7 percent last month after a surging 134.9 percent in January. Vehicle orders fell 1.9 percent after a 2.3 percent drop the prior month.

Durable goods orders are a leading indicator of manufacturing activity, which in turn provides a good measure for overall business health.

New durable goods orders excluding transportation rose 0.9 percent in February after falling 0.6 percent the previous month. Analysts polled by Reuters had expected new orders excluding transportation to rise 0.6 percent.

Excluding defense, orders were up 1.6 percent after a 1.7 percent rise in January.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, rebounded 1.1 percent last month after a 3.9 percent fall in January. The increase was however below markets expectations for a 2.3 percent rise.

Shipments, which go into the calculation of gross domestic product, fell 0.6 percent in February after slipping 0.1 percent in January. Unfilled orders increased 0.4 percent, the largest gain since July 2008, after rising 0.2 percent in January.

Separately, U.S. mortgage applications fell for a second straight week, with demand for home loan refinancing sinking to its lowest level in a month as interest rates jumped, the Mortgage Bankers Association said.

Demand for purchase loans edged higher, but activity was down from a year earlier. The Mortgage Bankers Association's seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, decreased 4.2 percent for the week ended March 19.

(Reporting by Lucia Mutikani; additional reporting by Julie Haviv and Richard Leong in New York; Editing by Andrea Ricci)

Manufacturing