The pace of growth in the U.S. services sector hit its highest in 8-1/2 years in July, boosted by growth in business activity, new orders and employment, according to an industry report released on Tuesday.

The Institute for Supply Management said its services index rose to 58.7 last month, the highest since December 2005, from 56.0 in June. The reading blew past economists' forecasts for 56.3, according to a Reuters survey.

A reading above 50 indicates expansion in the sector.

Non-manufacturing business activity rose to 62.4, the highest since February 2011, from 57.5 in June, and the new orders index jumped to 64.9, the highest since August 2005, from 61.2 in June. Employment rose to 56, a six-month high, from 54.4.