By Peter Griffiths and Olesya Dmitracova
LONDON, Oct 25 (Reuters) - Olympics spending fuelled Britain's strongest quarterly growth in five years, springboarding the country out of recession in the third quarter, data showed on Thursday
It provided some rare relief for a government accused of favouring austerity over growth, and may make another stimulus injection of cash from the central bank less likely.
The Office for National Statistics said gross domestic product rose by 1.0 percent between July and September, beating forecasts for a 0.6 percent gain, after shrinking by 0.4 percent between April and June.
The country is not out of the woods, however. It has still not recovered the output lost in the 2008-2009 slump and faces a rough road to recovery as the euro zone - its main trading partner - is heading for recession and global growth drivers such as China slow.
The data was also inflated by temporary factors - ticket sales for the London Olympics and a rebound from an extra public holiday in the previous quarter.
But it was nonetheless better than expected and could prevent the economy from have an overall contraction in 2012.
Sterling hit a one-week high versus the dollar and British government bonds extended losses after the data was released as markets reassessed the chances of more central bank asset-buying stimulus.
A number of economists changed their view in the wake of the growth figures and more upbeat comments from central bankers, which seem to hold high hopes that a new funding scheme for banks will unblock lending and get the recovery going.
"In the absence of a renewed stalling in the recovery, we expect this month's asset purchases to be the last," economists at Barclays said in a note.
Any more sustainable recovery could also ease the pressure on the government to ease its austerity plan of tax hikes and spending cuts aimed at erasing a huge budget deficit.
Prime Minister David Cameron, who is trailing in the polls, said the return to growth was a vindication of his policies, though he also struck a note of caution.
"There is still much more to be done, there is a long road to travel," Cameron said. "But we have got the right approach and we must stick to that approach.
Opposition Labour finance spokesman Ed Balls meanwhile kept up his call for a change of tack. "The complacent thing to do now is simply to wait and hope things will get better," he said.
Most economists agree that a sustained recovery is far from certain after business surveys have indicated a weak start to the final quarter of the year and one-off factors were the main drivers behind the strong bounce.
The statistics office estimated that Olympics ticket sales accounted for a fifth of the quarterly GDP rise, which followed three consecutive quarters of contraction.
Economists also estimate that 0.5 percentage points were due to the rebound from the output lost due to the extra holiday in June to celebrate Queen Elizabeth's 60 years on the throne.
The ONS said the British economy had grown by 0.3 percent so far this year, but was still 3.1 percent below a peak in the first quarter of 2008.
Bank of England Governor Mervyn King cautioned on Tuesday that the recovery would remain slow, with threats posed by the euro zone debt crisis and a cooling of the fast-growing economies of India, China and Brazil.
However, two of the nine BoE policymakers struck a note of confidence in newspaper interviews. Paul Fisher and Charlie Bean said the central bank's new scheme to get credit flowing through the economy showed promising signs.
Investors have already scaled back expectations for another cash boost from the BoE as King said policymakers would think "long and hard" before extending the currently approved 375 billion pounds of quantitative easing bond purchases.
However, there have been signs that the British economy faces grave threats in the months ahead. British factory orders posted a surprise fall in October, a the CBI's industrial trends survey showed on Wednesday.
WPP, the world's largest advertising group, cut its revenue outlook for the second time in as many months on Thursday after a sharp slowdown in September in North America and continental Europe hit its third quarter.
Output in Britain's service sector - which makes up more than three quarters of GDP - rose by 1.3 percent in the third quarter after a 0.1 percent drop in the second quarter. That was the strongest quarterly growth since the third quarter of 2007.
Industrial output was 1.1 percent higher, the strongest rise since the second quarter of 2010. Construction - which accounts for less than 7 percent of GDP - contracted by 2.5 percent.