U.S. services sector activity rebounded from a four-year low in July amid a rise in orders and employment, which could help to quash fears of a recession that were sparked by a surge in the unemployment rate last month.

The Institute for Supply Management (ISM) said on Monday that its nonmanufacturing purchasing managers (PMI) index increased to 51.4 last month from 48.8 in June, which was the lowest level since May 2020. A PMI reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of the economy. The ISM views readings above 49 over time as generally indicating an expansion of the overall economy.

Economists polled by Reuters had forecast the services PMI rising to 51.0.

Government data on Friday showed the unemployment rate increased to nearly a three-year high of 4.3% in July from 4.1% in June. The labor market is slowing as the Federal Reserve's hefty interest rate hikes in 2022 and 2023 curb demand.

The U.S. central bank last week kept its benchmark overnight interest rate in the 5.25%-5.50% range, where it has been for more than a year but opened the door to reducing borrowing costs as soon as its next meeting in September. Financial markets are also expecting rate cuts in November and December.

The ISM survey's new orders measure rebounded to 52.4 from 47.3 in June, which was the lowest since December 2022. Its measure of services employment increased to 51.1 from 46.1 in June. That would support views that the slowdown in nonfarm payrolls in July did not signal the start of labor market deterioration.

Nonfarm payrolls increased by 114,000 last month, the second smallest gain this year.

Services inflation picked up a bit in July, but probably not enough to alter the picture of subsiding price pressures. The ISM's prices paid measure for services inputs edged up to 57.0 from 56.3 in June.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)