BUSINESS activity in Scotland increased at the sharpest rate in more than two years last month as the private sector economy showed signs of shaking off its prolonged malaise, albeit at a slightly slower pace than the UK as a whole.

The Bank of Scotland's purchasing managers' index rose to 54.4 points in May, up from 53.1 in the previous month and the highest level for 25 months. This was slightly behind the UK at 54.6 points.

Anything over 50 points signals private sector expansion.

But growth remains largely the preserve of domestic-facing companies with export orders falling.

Duncan MacRae, chief economist at Bank of Scotland said: "Output grew in manufacturing and activity was strongly up in the large services sector with an encouraging rise in new orders across the economy evident for the sixth month in succession.

"However, growth appears confined to the domestic market."

The pace of job creation also quickened with the rise in employment sharper in Scotland than in any other part of the UK except the West Midlands.

The amount of work in progress, but not yet completed at Scottish businesses fell slightly, extending the period of depletion to four months.

Both factory production and service sector business activity accelerated, recording the sharpest rise in 12 and 13 months respectively although this is only the second consecutive month of growth for manufacturers.

Behind the overall increase in output north of the Border was a further improvement in inflows of new work.

The level of new business has now increased for six months running, and the latest rise was the most marked in more than two years.

However, it was not enough to match output with backlogs of work declining for the fourth consecutive month.

New export orders placed with manufacturers fell fractionally on the month, the first drop since January. Companies blamed the fall on a lack of confidence and strong competition in overseas markets.

Nevertheless the rate of job creation at manufacturers accelerated in May to the fastest rate since February.

Meanwhile, in Scotland's dominant service sector, the level of business activity rose sharply with the strongest increase since April 2012 as it benefited from the sharpest increase in the level of new business since March 2011.

Service providers reported that they had benefited from increased marketing efforts, greater customer confidence and a widening of their product ranges. Some firms said that a stronger housing market had also boosted the level of orders.

This allowed the year-long increase in employment in the sector to continue.

However the level of outstanding work barely moved.

There was a further drop in input price inflation in the Scottish private sector economy, to the slowest since June 2012, offering some respite to profit margins.

The rate of inflation was below the long-run average, although still much faster than that recorded at the UK level.

Bank of Scotland reported that anecdotal evidence suggested lower fuel prices dampened overall inflationary pressures in Scotland.

The figures will provide some relief at a time when the economy continues to face the challenge of the Coalition Government's austerity measures as well as continued troubles in key markets on the continent.

Mr MacRae said: "These results show the recovery in the Scottish economy is becoming more strongly embedded in every passing month."