A separate report showed construction spending hit a five-month high in November, adding to evidence that the US economy picked up steam in the final quarter of last year after growing at a 2.6 percent rate between July and September.
Most promising for investors was the Institute for Supply Management's national factory activity index, which rose for the 17th straight month in December.
The report showed new orders rose, suggesting momentum for growth ahead, though factory sector employment slipped to a nine-month low.
Still, the data dovetailed with strong readings on employment and consumer spending over the last three months of 2010, prompting economists to predict a fragile US recovery may this year finally turn into self-sustaining growth.
"We're (starting) off the new year on a strong foot," said Zach Pandl, US economist at Nomura Securities, adding the report "suggests the economy is accelerating and growth should be 3 percent in the first quarter."
The US manufacturing sector grew at a slightly faster pace in December, marking its 17th straight month of expansion.
A caveat for the sunny outlook remains the unemployment rate, which stood at 9.8 percent in November and is expected to remain high for much of the year. The government's closely watched employment report due Friday is expected to show employers added 140,000 jobs last month, not enough to make much of a dent in the jobless rate.
Ian Shepherdson, chief US economist at High Frequency Economics, warned as well that the ISM index tells investors little about the health of small businesses and has tended to overstate the pace of economic growth over the last three quarters.
Economists at Goldman Sachs, however, said they now think signs of stronger US growth will at least dissuade the Federal Reserve from adding to a $600 billion bond-buying program when it ends in mid-2011.
The bank's economics team had predicted the bond-buying scheme, aimed at boosting growth and holding down long-term interest rates, could swell to as much as $2 trillion, but have since "beaten a hasty retreat."
"If real GDP grows at a 3-1/2 percent to 4 percent pace in the first half of 2011, it is hard to see" additional bond purchases, they wrote in a note to clients.
Goldman still expects inflation to remain low and said the Fed is likely to hold short-term interest rates near zero all year and possibly through 2012.
