The latest survey by the British Chartered Institute of Purchasing and Supply, published yesterday, said manufacturing output posted its biggest increase for two years last month, despite the pound's sustained strength against the euro.

Healthy domestic consumer demand has helped underpin activity. Order books expanded and exports also accelerated, suggesting that companies had benefitted from an improvement in global demand. The institute's composite activity index rose from 48.1 to 49.4, staying below the crucial break-even level.

Economists said companies appeared to be coping with the strong pound, which has risen 24 per cent against a trade-weighted basket of currencies since August 1996 and ended yesterday at 0.65 against the euro.

The report is the latest in a string of surveys suggesting UK growth is recovering in response to interest rate cuts by the Bank of England, the UK central bank.

Official statistics have shown that output was flat in the first quarter of this year, after slowing sharply in the second half of 1998 as business reacted to previous monetary tightening and suffered the effects of a wider global downturn sparked by the Asian crisis.

Since then, and following aggressive monetary easing by the Bank, consumer confidence has rebounded and the housing market has picked up.

The institute said the increase in manufacturing output in May, the second consecutive monthly rise, was driven almost entirely by higher production of consumer goods.

Hopes that increased consumer spending will continue to support the manufacturing sector will be boosted by figures today showing a sharp increase in house prices.

In contrast to the Confederation of British Industry last week, the institute reported a surprising jump in export orders. This reflected a broad improvement in overseas demand.