* Business * Recession New hope that the UK is pulling out of recession

Gordon Brown was given fresh cause for optimism today as a slew of new figures gave the clearest indication yet that the British economy is beginning to pull out of recession.

The data showed unexpectedly strong signs of recovery in the housing, manufacturing and all-important services sectors, bucking almost two years of constant bad news on the economy which has badly damaged Labour's hopes of securing a fourth general election victory.

The positive trend may be underlined at midday today when the Bank of England announces whether it will continue with its radical policy of pumping billions of pounds into the economy. A decision to pause the £125bn scheme, predicted by many in the City, would signal that the Bank believes the plan has succeeded in refloating the economy from the depths of its trough at the start of the year.

Although the economy has shrunk in the past five quarters, today's figures and a week of improved news from Britain's banks suggest growth could return by the end of year.

The news will provide some relief for Downing Street, which badly needs ammunition for fighting a probable spring election. It could also help Brown rebuild his reputation for economic competence as he prepares for the crucial party conference season next month.

But analysts cautioned that the signs of recovery were still only tentative. Vicky Redwood, UK economist at Capital Economics, said: "Overall, these surveys provide encouraging evidence that the economic recovery is building up a decent amount of momentum. But the recovery is still in its early stages."

As Lloyds bank reported a loss of £4bn, influential voices in the City warned that unemployment and personal debt will continue to rise, potentially spiking any recovery. One City expert predicted that as many as 400,000 households could be failing to make mortgage payments by the end of the year.

But after months of steep falls in the value of their properties, homeowners will be encouraged by a survey by the Royal Institution of Chartered Surveyors (Rics) published today which says house prices may end 2009 higher than last year. Earlier this year it predicted a 10% fall.

The Halifax, meanwhile, reported that house prices rose by 1.1% last month, the second increase in the last three months and one which echoed a report from Nationwide last week.

Rics senior economist Brigid O'Leary said: "There has been a clear change in the housing market over the past few months and, as a result, it is unlikely that we will now see the kind of house price falls widely predicted at the start of the year. The return of buyer demand and the limited availability of housing on the market could be enough to support prices so it wouldn't be surprising to actually see prices increase further from here in the short term."

There was a similar pick-up in the services sector, the country's engine room, accounting for 75% of the economy, where there was a sharp rise in activity last month, according to the widely respected Chartered Institute of Purchasing and Supply survey.

Running from accountants and hairdressers to hotels and restaurants, the services sector indicator grew for the third consecutive month in July – the strongest rise in 17 months.

"The services number … is very much consistent with the green shoots recovery story," said Mark Miller, economist at HBOS. "It continues the theme that the forward-looking business surveys are showing some more encouraging signs."

But it was not only the services area that showed signs of recovery. In June factory output surged to its best performance in 17 months on the back of a surprisingly strong performance in the car industry.

Figures from the Office for National Statistics showed that industrial output, which had collapsed late last year as factories shut their doors, rose by a stronger-than-expected 0.5% in June from May.

The pound responded by surging to its strongest level against the dollar since October – $1.70. Although the FTSE100 share index fell slightly yesterday, it has risen more than 30% since March as investors have regained confidence that the economy is on the mend.

But Howard Archer, economist at IHS Global Insight, said he believed house prices were "highly likely" to fall further over the coming months. "Much will clearly depend on whether or not the economy can return to growth in the near term and then sustain recovery, how much further unemployment rises, how quickly and to what extent credit conditions ease, and how many properties come on to the market over the coming months."