The U.S. service sector contracted less severely than expected in December, according to a report released Tuesday.

But a separate report showed factory orders dropped more than expected in November.

The Institute for Supply Management said its non-manufacturing index came in at 40.6 in December versus November's 37.3.

The level of 50 separates expansion from contraction. The index dates back to July 1997.

Economists had expected a reading of 37.0, according to the median of 56 forecasts in a Reuters poll, which ranged from 34.5 to 42.0.

The service sector represents about 80 percent of U.S. economic activity, including businesses such as banks, airlines, hotels and restaurants.

Like the service sector, manufacturing is also depressed, as the deepening year-old recession continues to hammer the world's largest economy.

U.S. factory activity fell to a 28-year low in December, the Institute for Supply Management said on Friday, producing a bleak outlook for the start of 2009.

A new report on factory orders showed new orders received by U.S. factories plunged a much-greater-than-expected 4.6 percent in November, the fourth straight monthly decline and a sign the sharp drop in manufacturing is deepening the recession, a government report showed on Tuesday.

It was the first time factory orders had fallen for four consecutive months since the government began assembling the data in its current form in 1992, the Commerce Department said. Analysts polled by Reuters were expecting factory orders to drop 2.5 percent.

An indicator of business confidence rose, however, as non-defense capital goods orders excluding aircraft rose 3.9 percent The total value of shipments fell 5.3 percent, the sharpest drop since the government began assembling the data in its current form in 1992.