The boom in export orders helped manufacturing industry expand to its highest level for 18 months, the Chartered Institute of Purchasing and Supply said.
Bond yields leapt to their highest levels in almost a year on concerns that interest rates are set to rise.
The survey will add to pressure for a rate rise on Thursday when the Bank of England weighs up current low inflation against signs that prices pressures in the pipeline could threaten its two-year target.
CIPS' purchasing managers index (PMI) registered 52.7 on an index where a number over 50 represents expansion - and the highest level since December 1997.
New orders rose for the fourth month in a row and at their fastest rate for two and half a years.
The export component of new orders rose at its fastest rate since 1996 - the first time CIPS analysed overseas demand - despite the strength of sterling.
"Export demand increased, despite a further appreciation of the pound," CIPS said. "The growth of domestic demand outstripped even the improvement in export orders, largely as a result of growing consumer confidence and improving business conditions."
The survey showed the recovery was broadly based with intermediate and investment goods companies sharing in the growth alongside consumer industries.
CIPS said there was no sign that stronger demand for finished goods was accompanied by a tightening of the market for inputs in July.
The prices index recorded another fall although at a significantly slower rate than in June.
It said the rate of input deflation was the lowest for three and a half years because of rising oil prices and higher import prices following the depreciation of sterling against the dollar.
But employment in the sector continued to decline. Respondents said they had again reduced staffing levels, often through redundancies, so as to boost productivity and improve cost structures.
The survey is the latest to point to a recovery following official estimates of expansion in the second quarter.
Economists said the data would fuel fears that the Bank of England will have to raise interest rates to dampen down inflationary pressures. Jeremy Hawkins, of Bank of America, said: "The survey shows a decent recovery in manufacturing and will strengthen the view that base rates have bottomed."
Ian Stewart, of Merrill Lynch forecast "modest" tightening of monetary policy next year. People are starting to talk about a rate rise this year but it's far too early for that simply because inflation is well under control, and the labour market is cooling."
The benchmark 10-year bond fell 0.2 to 103.9 driving the yield up to 5.36 per cent - its highest since August 1998. "Gilts were hit badly by CIPS," said Steven Pearson of Halifax.
The recovery among European manufacturers is also accelerating, according to data published yesterday.
The Eurozone PMI was 53.0 in July, the highest since August 1998 and the fourth consecutive monthly expansion. It compared with 51.6 in June.
The German and Italian indicators showed manufacturing expanded for the first time in 10 months.
The index showed an expansion in employment for the first time since last October.
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