THE UK's economic recovery has continued to gather pace after an encouraging start to the year, according to a report.

The British Chambers of Commerce (BCC) said a number of the key indicators in its quarterly survey were at their best level since 1997 as both the manufacturing and service sectors benefited from improved conditions.

David Frost, BCC director general, said: "This quarter's results are encouraging, especially for the manufacturing sector.

"There are realistic prospects that Britain's recovery, which remains stronger than in the Euro area, will continue to gather momentum."

Manufacturing employment surged to its highest level in more than six years, while confidence in turnover within the sector was at its highest since 1999.

The BCC added the balance of factory-based firms reporting an increase in exports was now at a seven-year high after a steady improvement late last year.

However, businesses were warned to treat the progress with caution due to recent setbacks in the manufacturing recovery, such as weak output figures from the Office for National Statistics.

Service companies remained buoyant, although the survey warned that their export markets were soft.

Within the domestic market, the performance of the service sector remained stronger than in manufacturing, although the gap narrowed considerably for home orders.

David Kern, BCC economic advisor, said the Bank of England would have to raise interest rates if this recovery accelerated.

But he said: "We urge them to maintain a cautious stance, taking fully into account the problems faced by the manufacturing sector and the strength of sterling."

The survey for the first quarter of this year covered 6,149 companies employing 450,000 people across the UK.