NEW YORK (Reuters) - The U.S. manufacturing sector snapped out of its deepest slump in a decade in February as factories ramped up activity for the first time since July 2000 to meet a wave of new orders, an industry report showed on Friday.

Adding to evidence the economy is recovering from recession, demand for manufactured goods surged in February, pushing factories to raise production even as they continued to whittle down inventories.

The Institute for Supply Management's monthly Purchasing Managers Index rose to 54.7 in February from 49.9 in January, breaking above the 50 level and indicating expanding factory activity after 1-1/2 years of decline.

The index was far stronger than the 50.9 reading economists had expected, and the surprising strength lifted the stock market and the dollar and sent U.S. bond prices tumbling.

The report showed factories continued to shed jobs in February -- albeit at a slower pace -- indicating it will take time before a brighter economic outlook brings relief to manufacturing workers, who have been hard hit by the recession.