The services sector grew at its fastest pace in nearly four years in March and future home sales unexpectedly rose in February bolstering hopes for sustainable economic recovery and job growth.

The vast U.S. services sector, which has been lagging other areas of the economy, accounts for some two-thirds of U.S. economic activity. Analysts say growth in this sector bodes well for consumer spending and overall employment.

The positive news on U.S. service and housing activity, coupled with last Friday's solid jobs report raised expectations the Federal Reserve will tighten monetary policy sooner rather than later.

The improvements in the U.S. economy should give the Fed the nudge that they need to unwind emergency measures and tighten monetary policy more quickly, said Kathy Lien, director of currency research at GFT in New York. The milestones the service sector and housing market reached reflect not only the strength of the recovery, but also the rosier prospects that lie ahead.

The Institute for Supply Management said its service index grew in March for a third straight month, jumping to 55.4, its strongest reading since May 2006. That was up from February's 53.0 reading and above economists' forecasts for 54.0 for March.

A reading above 50 indicates expansion in the sector.

The service sector lags other areas of the economy and the March data provided another optimistic indication that the recovery is gaining traction, said Joseph Brusuelas, chief economist at Brusuelas Analytics in Stamford, Connecticut.

U.S. interest rates are set to stay near zero for the time being, though the U.S. Federal Reserve stands ready to take action if signs of inflation begin to mount, top central bank officials said earlier this month.

U.S. benchmark Treasury yields touched 4 percent for the first time in 10 months on Monday amid expectations the Federal Reserve will pursue a less accommodative monetary policy to forestall a pickup in inflation.

U.S. stock indexes rose and the dollar pared losses against the yen after the data, which bolstered hopes that the economy is recovering swiftly from a deep recession.

The ISM non-manufacturing index also showed its employment component rose slightly in March, while new orders jumped as well.

The data confirms the increase in service sector employment in the March non-farm payroll report and supports our call of a rate of growth in the first quarter of 3.0 percent, Brusuelas said.

The Conference Board, a private research group, said the U.S. job market strengthened for a seventh straight month in March, with fewer Americans having trouble finding work.

Economists say job growth is essential for continued economic expansion, particularly as government stimulus spending starts to fade. And despite improvements in the labor market, the jobless rate remained at 9.7 percent in March for a third straight month.

A separate report on Monday from the National Association of Realtors showed contracts for pending sales of previously owned homes unexpectedly rose in February.

The Realtors said its Pending Home Sales Index, based on contracts signed in February, rose 8.2 percent to 97.6 from a downwardly revised 90.2 in January.

Analysts polled by Reuters had forecast pending home sales, which lead existing home sales by one to two months, would remain essentially unchanged in February.

Reports last week showed the U.S. manufacturing sector grew for an eighth straight month in March, expanding at its fastest pace since July 2004, while U.S. employers added jobs last month at the fastest rate in three years.

Looks like the good news continues, said Alan Gayle, senior investment strategist at Ridgeworth Investments in Richmond, Virginia. All this suggests that the economic recovery is spilling over into job creation.

(Additional reporting by Corbett B. Daly and Lucia Mutikani in Washington and Camille Drummond, Ryan Vlastelica and Emily Flitter in New York; Editing by Andrew Hay)

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