The Nikkei Manufacturing Purchasing Managers' Index INPMI=ECI, compiled by IHS Markit, rose to 54.7 in December from November's 52.6, marking its fifth straight month above the 50 level that separates expansion from contraction.
The latest survey showed the new orders sub-index, a proxy for domestic demand, also rose to 56.8 in December, the highest since October 2016.
December data indicated towards resilient demand for new construction projects, as emphasized by the most rapid upturn in new order volumes since May. The prospect of greater workloads ahead led to stronger rises in employment and purchasing activity in December.
Meanwhile, input price pressures intensified with the rate of cost inflation accelerating for the second consecutive month. Although the rate of input cost inflation picked up since November, it remained softer than February's peak.
"The Indian manufacturing sector ended the year on a strong note, with operating conditions improving at the strongest rate in five years", IHS Markit said in the report. The headline index has signaled growth for 54 successive months.
The eurozone economy ended 2017 with its strongest growth in nearly seven years, helped by a steep increase in service sector activity and a near-record expansion of manufacturing production, data on Thursday suggested. The balance of firms anticipating a rise in output levels continued to be among the weakest recorded since mid-2013, which survey respondents mainly attributed to concerns about the wider United Kingdom economic outlook.
"It appears that the continued fall in commercial activity was testament to Brexit-related uncertainty on the horizon and the sector's fear about the direction of the United Kingdom economy as clients still hesitated to spend on bigger projects".
The number of new jobs being created across the sector touched its highest level since June, according to the report, which showed housebuilding work had grown for the 16th month on the bounce.