UPDATE 1-Australia service sector activity expands in June

* Service sector PMI jumps 10.3 points to 50.2

* Ends 14 straight months of contraction (Adds detail)

SYDNEY, July 3 - Activity in Australia's service sector expanded in June for the first time in 15 months as fiscal stimulus and low interest rates boosted demand.

The Australian Industry Group (AiG)-Commonwealth Bank Performance of Services Index (PSI) rose 10.3 points to 50.2, taking it just above the 50 level that marks the threshold between growth and contraction.

The survey of around 200 companies found a broad-based improvement in activity with sales growing for the first time in over a year and a promising rebound in new orders.

"Improving conditions in the services sector are consistent with other recent news which suggests that the economy may well sidestep a severe recession in 2009 despite the negative headwinds from the global economic meltdown," said John Peters, a senior economist at CBA.

Data earlier in the week showed retail sales rose a strong 1.0 percent in May, and the service survey suggested consumer demand had stayed firm into June as well. The survey's index of sales climbed 16.1 points to 55.2, the highest reading since the start of 2008, with finance & insurance, health & community services and retail trade all expanding.

The measure of new orders also climbed 16.6 points to 51.5 in June, holding out hope the recovery would prove sustainable.

There was also better news on jobs, with the index of employment rising 2.5 points to 48.5, the highest reading in a year. The service sector is easily the biggest employer in Australia and the improvement might lessen the risk of a very weak jobs report for June, due next week. The brighter outlook was driven by sharply lower mortgage rates and the Labor government's stimulus packages, including cash handouts, tax cuts and a grant for first-home buyers, which have boosted activity in the retail, wholesale trade and property sectors.

The Reserve Bank of Australia (RBA) has cut interest rates by 425 basis points since September to a record low of 3.0 percent. The central bank holds its July policy meeting next week and is widely expected to keep rates steady.