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(Corrects prior month index figure in 2nd paragraph to 96.6)
* Rise in lending nearly erases four months of declines
* Small businesses have record low loan delinquencies
By Ann Saphir
CHICAGO, July 2 (Reuters) - Lending to small U.S. businesses rose in May to its highest level this year, a sign of stronger economic growth ahead even as other data suggests fragility, a report showed on Monday.
The Thomson Reuters/PayNet Small Business Lending Index, which measures the overall volume of financing to small U.S. companies, rose to 108.4 from an upwardly revised 96.6 in April, PayNet said. The gain reversed most of the declines of the prior four months.
Borrowing rose 18 percent in May from a year earlier, exceeding the average 2011 pace of 17 percent. The lending index historically has pointed to changes in overall economic growth several months later.
Low interest rates and stronger corporate balance sheets are probably fueling the increase in borrowing, said PayNet founder Bill Phelan.
And while the latest data is for only one month, he added, "I think it means we have a higher chance of sidestepping another contraction in the economy."
The jump in small business lending contrasts with other data signaling economic trouble, including a drop in consumer confidence in June and stalled consumer spending in May.
Top U.S. Federal Reserve officials, who have already slashed borrowing costs and have said they plan to keep rates near zero until at least 2014, are sifting through conflicting data to determine whether they should unleash another round of bond-buying to boost the recovery.
Last week several Fed policymakers said they had trimmed their growth forecasts, but there was no clear consensus that more stimulus would be needed.
Separate PayNet data showed that fewer companies are falling behind on their existing loans, boding well for their capacity to borrow now and in the future.
Accounts that were behind in payments by 30 days or more fell to 1.18 percent of the total from 1.28 percent in April, far below the high of 4.41 percent reached in May 2009. This was also the lowest level since PayNet began tracking the data in 2005.
Accounts behind 90 days or more, or in severe delinquency, dropped to 0.29 percent from 0.34 percent.
Accounts behind 180 days or more, which are considered in default and unlikely ever to be paid, eased to 0.40 percent from 0.44 percent.
PayNet collects real-time loan information, such as originations and delinquencies, from more than 250 leading U.S. lenders. (Reporting by Ann Saphir; Editing by Lisa Von Ahn)