The U.S. service sector grew in September for the first time in more than a year, creating jobs in banking and restaurants and giving a fresh sign that the economy is healing after doubts cast by recent poor data.

The Institute for Supply Management's (ISM) services index rose on Monday to 50.9 last month, beating expectations of 50.0, the dividing line between growth and contraction.

The better news on the economy contrasted with monthly payrolls data on Friday from the U.S. Labor Department that showed employers unexpectedly cut more jobs in September than in August, underscoring the fragility of the U.S. economy's recovery from its worst recession in 70 years.

We need to see the service sector doing better because it's such a big part of the economy, said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.

This is a good way to start off the week after a sour non-farm payrolls on Friday.

The services sector represents about 80 percent of U.S. economic activity, including businesses such as banks, airlines, hotels and restaurants. (For a graphic on the ISM report, see http://graphics.thomsonreuters.com/109/US_PMIMS1009.gif)

Though not planning a second stimulus package, U.S. President Barack Obama's advisers are considering a number of programs for creating jobs, White House spokesman Robert Gibbs said on Monday.

The plan would also include extending unemployment payments and Cobra health insurance benefits for the unemployed and continuing the $8,000 tax credit for first-time home buyers, Gibbs said.

U.S. stocks rose after the ISM data and benchmark Treasury debt prices were little changed, leaving the 10-year yield around 3.22 percent. The U.S. dollar was flat against other major currencies <.DXY>.

The euro zone's services sector also returned to growth.

Markit's final Eurozone Services Purchasing Managers' Index of around 2,000 companies expanded for the first time in 16 months in September at a slightly better rate than first expected, but job losses grew.

In other data, the U.S. job market strengthened in September for the first time since January of last year, according to the U.S. Conference Board.

The Conference Board, a private research group, said its Employment Trends Index edged up to 88.5 in September from an upwardly revised 88.2 in August, originally reported at 88.1.

The board's survey looks at a range of indicators for job growth ahead, including temporary hiring, industrial production and the percentage of respondents who say they find jobs hard to get.

The road to recovery is definitely going to be bumpy and may last unusually long, given the depth of the recession we have experienced, said Gad Levanon, senior economist at The Conference Board.

The index is now down 15.6 percent from a year ago.

Economists said on Friday that despite the worse-than-expected payrolls report on Friday, the data did not point to an end to the trend of moderating job losses.

U.S. SERVICE SECTOR EXPANDS FOR FIRST TIME IN OVER A YEAR

The ISM's September services index reading of 50.9 was up from 48.4 in August and its highest reading since 51.2 in May 2008.

The employment index rose to 44.3 last month from 43.5 in August.

The gain was a welcome development, and business activity picked up handsomely, BNY Mellon's Woolfolk said.

New orders are also up big. This is a solid report that is consistent with a 'glass half full' outlook.

The prices paid component of the index fell to 48.8 from 63.1 in August while the new orders index rose to 54.2 from 49.9 in August, its highest since October 2007

(Additional reporting by Steven C. Johnson; Editing by Padraic Cassidy)

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