The Institute for Supply Management, a trade group, said Monday its service index rose to 55.4 in March from 53 in February.
Economists surveyed by Thomson Reuters had expected a reading of 54. Any reading above 50 signals expansion.
It is the strongest pace of growth since ISM revised how it measured the service sector in January 2008.
The service sector is important as it accounts for about 80 percent of U.S. jobs excluding farmworkers. It includes jobs in areas such as health care, retail and financial services. The sector is highly dependent on consumer spending, which powers about 70 percent of the economy.
The recovery in services has been bumpy, lagging a resurgence in manufacturing amid high unemployment, slow wage growth and a rocky real estate market.
In March, growth in service companies' business activity soared to its strongest level since April 2006 and new orders are surging at their fastest pace since August 2005.
The report suggested the broader economy is recovering, said Jennifer Lee, economist at BMO Capital Markets. "It's much better news than we would have thought a few months ago," she said. BMO recently bumped up its prediction for first-quarter growth to 3.6 percent from 3.5 percent. During the fourth quarter, the economy grew at a 5.6 percent pace.
ISM said employment contracted for the 27th straight month in March, but the 49.8 reading was the closest to growth in jobs growth since the recession began. A level above 50 indicates jobs growth.
The government said last week that the economy added 162,000 jobs, the biggest gain since the recession began.
Of the 18 industries surveyed, 14 reported growth, two shrank and two held steady at February's level.