(Reuters) - U.S. manufacturing grew in April at the strongest rate in 10 months, easing concerns the economy had lost momentum at the start of the second quarter.

The Institute for Supply Management said on Tuesday its index of national factory activity rose to 54.8 from 53.4 in March. The figure bested expectations for a decline to 53.0 and came in above the top end of forecasts in a Reuters poll.

A reading below 50 indicates contraction in the manufacturing sector, while a number above 50 means expansion.

"The view on the economy has swung from optimism to pessimism of late and this could bring us back to the middle," said Nick Bennenbroek, head of FX Strategy for North America at Wells Fargo.

"ISM suggests there's no real reason to get too concerned about the path of the U.S. economy at this point."

ISM's gauge of employment also rose to its highest since June, to 57.3 from 56.1. The forward-looking new orders component racked up its best reading in a year at 58.2, up from 54.5.

The strong labor figure comes ahead of the larger government nonfarm payrolls report due on Friday, which is forecast to show the economy added 170,000 jobs last month, including 22,000 manufacturing positions.

The ISM report was in contrast to some regional manufacturing reports, including Chicago on Monday, that had showed the rate of growth slowed last month.

It also bucked the trend of recent data that suggested the economy lost some steam as the second quarter got under way, highlighting the bumpy nature of the recovery.

"We think the latest recovery is made of sterner stuff, although we doubt it will set the world alight," Paul Dales, senior U.S. economist at Capital Economics, wrote in a note.

The economy grew at a 2.2 percent rate in the first quarter, a step back from the 3 percent pace logged in the final months of 2011.

The data sent Wall Street higher with U.S. stocks up about 1 percent in late morning trading. It also helped the dollar rally from a one-month low against the euro, while Treasuries prices fell.

Separate data on Tuesday showed construction spending barely rose in March as investment in public projects dropped to a five-year low.

Construction spending edged up 0.1 percent to an annual rate of $808.07 billion, the Commerce Department said, after a revised 1.4 percent drop in February. Economists polled by Reuters had expected construction spending to rise 0.5 percent.

Also, lending to small businesses - a key driver of employment - fell for the third month in a row in March.