The latest ONS figures could spell good news for the Chancellor

The Office for National Statistics (ONS) revised growth up to 0.7% in the three months, from an initial 0.6%.

The ONS said the increase was due to higher estimates for construction output and VAT receipts.

The increase means that Chancellor Gordon Brown could be on target to hit his growth target of 2-2.5% - an event that had looked unlikely in April.

Surprise news

Geoffrey Dicks, chief economist at RBS Financial markets said: "The upward revision was a surprise in terms of the disappointing September industrial production and trade data.

"It will give the Chancellor something to hang his more optimistic forecasts on in next month's Pre-Budget Report."

Household spending, the largest part of GDP remained strong, gaining 0.7% during the three months, following a similar increase in the previous quarter.

Growth is dependent on consumer spending but there is a trade drag and big falls in business investment John Butler, HSBC

Government spending also rose 0.6% to stand 4.3% up on a year ago.

Earlier this month, the Bank of England (BoE) raised rates for the first time since February 2000, amid expectations of an economic recovery that may push inflation higher.

But the latest ONS figures may raise concerns at the Bank as they illustrate that UK growth remain unbalanced - with services surging ahead as manufacturing remains sluggish.

Manufacturers struggling

"Growth is dependent on consumer spending but there is a trade drag and big falls in business investment," HSBC economist John Butler said.

The ONS also revealed that the latest GDP increase was offset by downward revisions in manufacturing, mining and quarrying.

Richard Batley, economist at the Halifax, added that the news was unlikely to tempt the BoE to raise rates as concerns still remain "below the surface" about the sustainability of the recovery.

The Organisation for Economic Cooperation and Development (OECD) reckons that borrowing costs will have to rise or inflation will not meet targets and house prices will boom then bust.

In a report released on Wednesday, the OECD warned that any sudden drop in house prices would lead to a slump in consumer spending.

Avoid that, however, and the UK economy would be set for robust growth, the think tank said.

The OECD predicts that growth will be 2.75% in 2004, accelerating to 3% in 2005.