* Official services PMI rises to 55.5 from 53.7 in Sept
* Reinforces signs that the worst is over for economy
* Construction, retail activities regain steam
By Kevin Yao and Wan Xu
BEIJING, Nov 3 (Reuters) - China's services sector rebounded in October from a two-year low in September on stronger activity in the construction and retail sectors, an official survey showed on Saturday, adding to signs of a modest economic recovery.
The official purchasing managers' index (PMI) for the sector rose to 55.5 in October from 53.7 in September, according to the latest survey from the National Bureau of Statistics.
The sub-index for the construction services sector rose to 60.2 from 58 in September while the sub-indices for activities in the sectors of retailers, hotels, environmental protection and public utilities all stayed above 60, the bureau said.
But the new orders sub-index for the services sector as a whole eased to 51.6 in October from 51.8 in September, it said without elaborating.
The Services PMI reading in September was the lowest in nearly two years, although the sector remains above the 50-point line that divides expansion from contraction.
The central bank has been steadily easing policy to boost credit while the National Development and Reform Commission (NDRC), the top economic planning agency, has been fast-tracking infrastructure projects to boost investment.
China's central bank said in a policy report published on Friday that it will prioritise supporting the economy above other needs, affirming expectations that the recovery in the Chinese growth engine is feeble at best.
The property sector has showed signs of warming up in recent months due to policy easing and support from local governments.
The services sector index follows two manufacturing PMI surveys that showed the economy may be regaining some steam in October following a series of policy steps..
"Overall, we can say that recent government stimulus steps have started to gain some traction," said Hua Zhongwei, senior economist at Huachuang Securities in Beijing.
"This is a positive sign which shows that increased investment is boosting demand for related services."
China annual GDP growth is expected to accelerate to 7.6 percent in the next quarter from 7.4 percent in the third quarter, snapping a seventh straight quarter of slower expansion and paving the way for beating the full-year target of 7.5 percent.
A similar survey of China's services sector will be released by HSBC on Monday.
China's services industry, which covers everything from banks, restaurants to Internet firms, has weathered the global slowdown much better than the factory sector, with the PMI consistently signalling healthy expansion.
China is already the world's manufacturing hub after three decades' breakneck growth, but its services sector is relatively underdeveloped, making up just 43 percent of GDP, compared with more than 70 percent in Western economies.
China aims to boost the share to 47 percent of GDP by 2015 as it tries to wean the economy away from polluting and energy-guzzling industries towards services and domestic consumption.
The government has expanded a pilot reform to replace business tax with value-added tax (VAT) from Shanghai to 10 more provinces and cities to ease tax burdens for the transport sector and some other services industries.
Beijing has been following a programme of pro-growth fine tuning of economic policies for a year and analysts broadly expect that to remain in place when a new leadership line-up of the ruling Communist Party is unveiled at a Congress this month.
The fine tuning includes two interest rate cuts, three reductions in the portion of deposits banks must keep as reserves (RRR) - freeing an estimated 1.2 trillion yuan ($190 billion) for lending.
The central bank has been relying on cash injection via its open market operations in recent weeks to boost bank credit. The record injection this week roughly matches the additional liquidity provided by a RRR cut.