The Philadelphia Federal Reserve Bank said its business activity index rose to minus 1.9 from minus 7.1 in August, topping economists' expectations for minus 4, according to a Reuters poll.

The forward-looking new orders gauge gained to 1.0 from minus 5.5. Both measures were at their highest levels since April, the last time either of them were above zero.

A source of strength early on in economic recovery, manufacturing has faltered in recent months. Thursday's survey suggests activity in the mid-Atlantic has steadied after five months of declines, the report said.

Any reading below zero indicates contraction in the region's manufacturing. The survey covers factories in eastern Pennsylvania, southern New Jersey and Delaware.

It is seen as one of the first monthly indicators of the health of U.S. manufacturing leading up to the national report by the Institute for Supply Management.

While the improvement in business activity is encouraging, the national and regional surveys have been pointing to softer manufacturing activity growth for the third quarter so far, said Cooper Howes, economist at Barclays.

U.S. stocks remained at lower levels immediately after the data, while Treasuries prices trimmed gains and the euro pared losses against the dollar.

The employment components improved but still pointed to a weak labor market. The gauge of the number of employees edged up to minus 7.3 from minus 8.6 and the average work week index likewise rose to minus 7.3 from minus 14.6.

Shipments tumbled to minus 21.2 from minus 11.3.

But firms were more optimistic about the coming months with the index of business conditions for the next six months jumping to its highest level since January at 41.2 from 12.5.