The jump in growth was subject to a number of temporary factors, including the Olympics, which may mask a weaker underlying picture.

But it was still much better than expected and may mean Britain's full 2012 economy will not be in the red.

The Office for National Statistics said Britain's gross domestic product rose by 1.0 percent between July and September, beating forecasts for a 0.6 percent gain, after shrinking by 0.4 percent between April and June.

On the year, the economy was flat, also better than expected.

The return to growth after three consecutive quarters of contraction was welcome news for a coalition government under pressure to do more to revive the economy.

However, the third quarter rise was boosted by ticket sales for the London Olympics - which the statistics office estimated accounted for a fifth of the quarterly increase - and a rebound from an extra public holiday in the second quarter.

Stripping out those one-off effects, economists said growth in the UK economy was weak and that headwinds from the euro zone were likely to act as a drag in the coming months.

"It was a very good number, but understandably good," said Alan Clarke, economist at Scotiabank, noting the lift from the Olympic ticket sales and what he estimated was about half a percentage point boost from the hit taken by the June extra holiday.

"There's now a good chance the economy won't actually contract on average for this year... It'll probably be flat and, in the context of monetary policy, it reinforces the case for the Bank of England to pause on quantitative easing."

Sterling hit a one-week high versus the dollar and British government bonds extended losses after the data was released.

After falls in unemployment and inflation last week, finance minister George Osborne said the figures vindicated the government's economic policies.

"There is still a long way to go, but these figures show we are on the right track," Osborne said. "Yesterday's weak data from the euro zone were a reminder that we still face many economic challenges at home and abroad."

CAUTION

Bank of England Governor Mervyn King cautioned on Tuesday that the recovery would remain slow, with threats posed by the euro zone debt crisis and a cooling of the fast-growing economies of India, China and Brazil.

However, two of the nine BoE policymakers struck a note of confidence on the economy in interviews with newspapers.

Paul Fisher and Charlie Bean noted that the central bank's new scheme to get credit flowing through the economy was showing promising signs.

Nevertheless, investors scaled back expectations for another cash boost from the BoE as King said policymakers would think "long and hard" before extending the currently approved 375 billion pounds of quantitative easing bond purchases.

The ONS said the British economy had grown by 0.3 percent so far this year, but was still 3.1 percent below a peak in the first quarter of 2008.

Britain has not fully recovered the output lost during the 2008-2009 slump that has left many Britons worse off and the economy slipped back into recession at the end of last year.

Output in Britain's service sector - which makes up more than three quarters of GDP - rose by 1.3 percent in the third quarter after falling 0.1 percent in the second quarter. That was the strongest quarterly growth since the third quarter of 2007.

Industrial output was 1.1 percent higher, the strongest rise since the second quarter of 2010. Construction - which accounts for less than 7 percent of GDP - contracted by 2.5 percent.

(Editing by Jeremy Gaunt)

• A Permanent Economic Emergency