The Institute for Supply Management said its services index rose to 56.8 last month from a revised 53.0 in December. It was the highest level sinceFebruary 2011.
Economists had expected the index to hold steady at 53.0, according to a Reuters survey. A reading above 50 indicates expansion in the sector.
Another report on Friday showed new orders for U.S. factory-made products posted a second straight monthly rise in December and business capital spending also picked up.
The Commerce Department said orders for manufactured goods increased 1.1 percent, slightly below Wall Street economist's forecast for a 1.5 percent gain.
But November's gain was revised up to 2.2 percent from a previously reported 1.8 percent and there were signs in the report of a firmer pace of overall factory activity.
During the full year 2011, factory orders gained 12.1 percent after a 12.9 percent rise in 2010.
Orders for non-defense capital goods excluding aircraft — a closely watched category because it is taken as a sign of businesses' future spending plans — climbed a solid 3.1 percent in December. That followed declines of 1.5 percent in November and 0.9 percent in October.
Shipments for this category also increased by 3.1 percent in December after matching decreases of 0.9 percent in each of the two prior months.
Business spending had been a driver of the recovery since the 2007-2009 financial crisis, which pushed the U.S. economy into a deep recession.
During December, there were widespread gains in key order categories from computers to fabricated metal products and transportation equipment. Orders for electrical equipment were down from November, one of the few categories that declined.
The market rallied on the news. Stocks added to sharp gains Friday, with the Dow flirting with its intraday high levels of last year.
