The economy grew slightly faster than initially thought in the fourth quarter and a gauge of factory activity in the Midwest hit a 10 month-high in February, pointing to underlying strength in the economy.

Gross domestic product expanded at a 3 percent annual rate, the quickest pace since the second quarter of 2010, the Commerce Department said on Wednesday in its second estimate.

The reading, which was up from the 2.8 percent pace the government reported last month and reflected modest upward revisions to almost all components of GDP, added to the recent run of fairly upbeat economic reports.

The tone of the GDP report was further bolstered by upward revisions to income and savings data, which should help support consumer spending in the face of rising gasoline prices.

Growth is still on the right path, but we are not going to see any acceleration. Income was revised up so it removed one of the headwinds to growth in the beginning of the year, said Yelena Shulyatyeva, an economist at BNP Paribas in New York.

A steady stream of fairly upbeat data ranging from employment to manufacturing has caused analysts to temper expectations of a sharp pullback in growth this quarter. First-quarter GDP growth is seen between 2 and 2.5 percent.

In another report, the Institute for Supply Management-Chicago said its measure of manufacturing in the Midwest region rose to a 10-month high of 64 in February from 60.2 in January.

A reading above 50 indicates expansion in the regional economy. Activity was boosted by a jump in new orders to a near one-year high and a backlog build-up.

The report, which also showed regional factory employment at its highest since May 1984, was in stark contrast with a sharp decline in demand for long-lasting manufactured goods in January reported by the government on Tuesday.

Durable goods orders are usually weaker in the first month of the quarter and that is particularly noticeable in January. Manufacturing is doing well, said Ryan Sweet, a senior economist at Moody's Analytics in West Chester Pennsylvania.

Economists have raised their forecasts for the Institute for Supply Management's report on overall manufacturing activity to be released on Thursday.

The ISM index of national manufacturing is now expected to be around 55, up from the 54.5 forecast in a Reuters poll.

Stocks on Wall Street initially rose on the data, but reversed gains to end lower amid disappointment that Federal Reserve Chairman Ben Bernanke gave no signal for further monetary stimulus.

But prices of Treasury debt, a traditional safe haven, fell on the signs of economic improvement. The dollar rose 0.7 percent against a basket of currencies.

ECONOMY HOLDING UP

Better economic data has reduced expectations that the Fed will ease monetary policy further by launching a third round of asset purchases, or quantitative easing, in order to drive down long-term interest rates and help boost economic activity.

Chairman Bernanke, in semi-annual testimony to Congress on Wednesday, offered no hints as to whether the U.S. central bank would undertake more bond purchases, but he said the labor market was far from normal.

Continued improvement ... is likely to require stronger growth in final demand and production, he said.

While data so far this year has been relatively upbeat, some of the gains reflect unseasonably warm weather. Analysts are watching gasoline prices, which early last year contributed to a softening in the economy that nearly pushed it back into recession.

Retail gas prices have jumped 12.6 percent, or 42 cents a gallon, since the start of the year and averaged $3.78 a gallon in the week through Monday.

The economy is heading in the right direction, but it's not off and running yet. Even though job growth is accelerating, long-term unemployment is a major problem, said Sweet.

A report from the Fed showed the economy expanded modestly in January through mid-February as hiring picked up a bit across several districts.

Recent employment gains are helping the economy.

The GDP report showed consumer spending - which accounts for about 70 percent of U.S. economic activity - grew at a 2.1 percent rate in the fourth quarter, revised up from 2 percent.

Real disposable income growth was revised up to a 1.4 percent rate from 0.8 percent. The saving rate was raised to a much stronger 4.5 percent rate from 3.7 percent.

There were also modest upward revisions to business investment in capital goods and spending on home building. Investment in nonresidential structures was modestly weak.

Still, the pace of business spending was the slowest since the 2007-09 recession ended.

While a rebuilding of inventories added a hefty 1.88 percentage points to GDP in the last quarter, the increase was revised down to $54.3 billion from $56.0 billion.

The large boost to GDP growth from stock building in the fourth quarter is unlikely to be repeated in the first quarter, but the household accounts provide a much more encouraging backdrop for consumer spending, said Peter Newland, a senior economist at Barclays Capital.

Excluding inventories, the economy grew at a 1.1 percent rate, up from the 0.8 percent rate initially reported, but a sharp step-down from the third quarter's 3.2 percent pace.

The report also showed exports were not as strong as previously thought, but imports were not robust, leaving a smaller trade gap that was less of a drag on growth.

Government spending was weak, hurt by a steep decline in defense outlays. Inflation pressures toward the end of the year were slightly elevated, instead of subsiding as the first report had said.

A price index for personal spending rose at a 1.2 percent rate instead of 0.7 percent. A core measure that strips out food and energy costs rose at a 1.3 percent rate instead of 1.1 percent.

The Fed would prefer to see this measure nearer its 2 percent inflation target.

(Additional reporting by Richard Leong in New York; Editing by James Dalgleish)

Ben Bernanke BNP Paribas