The services sector continued its revival last month as activity reached the strongest level for a year.

The Chartered Institute of Purchasing and Supply (CIPS) said the sector expanded for a third month in a row after overcoming the impact of the September 11 terrorist attacks in the United States.

Business confidence had hit a 16-month high as firms looked forward to a continued surge in demand.

Findings showed the key activity index moved further from the no-change mark of 50, registering 53.8 last month, up from 52.1 a month earlier.

The latest report followed upbeat surveys from showing an improvement in fortunes for the ailing manufacturing sector and a continued strong performance from construction firms.

The institute said strong competition and discounting aimed at attracting new business meant the number of firms passing on higher costs to customers only marginally outweighed those whose charges were forced down.

With margins remaining tight, CIPS said its findings suggested inflation should not be a major worry for the Bank of England.

Roy Ayliffe, the director of professional practice, said: "Purchasing managers are exploiting the current environment, securing competitive rates from service sector firms and subduing output price inflation.

"This means stable interest rates can safely be maintained and consumer spending will help sustain economy recovery."

Continued pressure on margins pushed staffing levels down for the sixth month as the majority of firms sought to meet increasing workloads by productivity improvements.

The study found growth was strongest in hotels and restaurants as the sector bounced back from the impact of the foot-and-mouth outbreak and September 11 on tourism.

Transport and communications saw buoyant activity levels, while growth was weakest in the financial sector.