Markit's purchasing managers' index for the U.K. construction sector rebounded more than expected in August.

The index rose to 49.2 from a more than seven-year low of 45.9 in July and was well ahead of the 46.1 reading analysts had forecast.

The Markit/Chartered Institute of Procurement & Supply report follows a Thursday manufacturing-sector PMI that was far stronger than expected and that boosted the pound while weighing on U.K. government bonds. The latest index will allay fears about post-Brexit damage to the construction industry, which equity investors punished severely immediately after the June 23 Brexit vote.

However, the August index remained in sub-50 contraction territory and Markit noted that the sector's stabilization remained only partial, with industry usage of sub-contractors and the rates subcontractors charge coming under pressure. It also said input costs are rising at the fastest pace in more than five years and warned of higher costs ahead because of the post-Brexit weakening of the pound.

"The downturn in U.K. construction activity has eased considerably since July, primarily helped by a much slower decline in commercial building," said Markit senior economist Tim Moore in a the report. "Construction firms cited a nascent recovery in client confidence since the EU referendum result and a relatively steady flow of invitations to tender in August."

TheStreet Recommends

But he warned that the sector hasn't returned to "business as usual."

"There were still widespread reports that Brexit uncertainty had dampened demand and slowed progress on planned developments, especially in relation to large projects. As a result, total new order volumes continued to fall during August, which stands in contrast to the three-year run of sustained growth seen prior to May 2016."

U.K. home builders had fallen before the Markit data and remained down, with Taylor Wimpey (TWODF) and Persimmon (PSMMF) among the main decliners on the FTSE 100, falling about 2.3%.

Real estate developers and investors Land Securities (LSGOY) and British Land (BTLCY) were both down more than 1%.

The pound was little changed against the dollar at $1.3271 and U.K. 10-year gilt yields were up 3 basis points at 0.69%.