BERLIN (Reuters) - Rising domestic and foreign demand, mainly from the U.S. and China, lifted German factory activity to a 28-month high in June, a survey showed on Friday, signaling that manufacturers are set to increase production in coming months.

Markit's Purchasing Managers' Index for manufacturing, which accounts for about a fifth of the German economy, rose to 54.5 in June from 52.1 in May.

The reading was the highest since February 2014 and above the 50 line that separates growth from contraction. It also came in higher than the preliminary reading of 54.4.

The rise was fueled by higher production, which posted its strongest increase in more than two years, and new orders, which rose for the 19th month in a row.

German manufacturers also hired more people for the third consecutive month in June, when the rate of job creation rose from May to the fastest since the beginning of 2012.

"With inventories of finished goods falling and both backlogs of work and new business growing, there's a good chance that companies will continue to scale up production in coming months," said Markit economist Oliver Kolodseike.

"Moreover, the fact that manufacturers raised their buying activity sharply supports the view that German industry will remain on an expansionary path, at least in the short term."

The survey concluded that manufacturing will have a strong effect on second-quarter growth.

"Although official industrial production numbers are likely to show some payback from the impressive start to the year, there are only few signs that point to a substantial slowdown," Kolodseike said.

He added: "It is therefore likely that the goods-producing sector will have acted as a boost to GDP growth in the second quarter."

Detailed PMI data are only available under license from Markit and customers need to apply to Markit for a license.

(Reporting by Joseph Nasr, editing by Larry King)