Activity in the services sector has risen to its highest level in five and a half years, according to the latest the NCB purchasing managers' services index. But the survey - which is compiled on a monthly basis - also shows that growing cost pressures in the sector are causing firms to increase prices.

Activity in the sector rose in seasonally adjusted terms to 65.6 in April, up from 63.1 in March. Any reading of the index above 50 indicates an expansion in overall activity, but the latest reading is the highest since September 2000 and April's jump was the sharpest recorded since April 2000.

More detailed indices in the survey pointed to a broadly based upturn in activity, with backlogs of work, new orders and expectations of new business in months ahead all rising strongly.

The employment index rose to 61.2 in April from 58.2 in March, showing that job creation in the sector - which accounts for two-thirds of the economy - was also strong. More than 30 per cent of firms recorded a rise in staffing levels as firms responded to growing order books.

NCB chief economist Dermot O'Brien said activity in the services sector was close to all-time highs.

"The headline index hit a level in April that has been exceed only three times in the survey's history. New business and business confidence strengthened noticeably in April and employment growth was very strong, near to the survey's historic high."

The positive outlook for activity was also broadly based in terms of sector. The transport, tourism and leisure sector recorded the highest jump in activity to 70.7 from 65.1 in March. Business service activity also expanded in April, while activity in the financial services and technology, media and telecommunications sector remained stabilised at high levels.

However, the services sector continues to experience rising cost pressures, with the index of average input prices rising in April to 63.7, from 60.7 in March.

As a result, the index of average prices charged jumped from 51.5 to 54.1. Average output prices have now increased for 10 consecutive months, but the pace of increase remains lower than the pace of input price growth.

The latest survey - compiled in Europe by the Royal Bank of Scotland and NTC Research - shows the euro-zone services sector expanded in April at its fastest rate in over five years.