The PMI in February moved above 50 points for the first time since last May.
"The PMI for March continues to indicate expansion in manufacturing activity, although at a more moderate extent," the report said, noting that the domestic demand component was above 50 for the first time in 15 months.
"Economic indicators in the first quarter were a bit more positive than the prior quarter, especially in exports of goods. But it can be seen in the current PMI that purchasing managers changed their estimates for exports, possibly due to a continued deterioration in Europe and the appreciation of the shekel."
The PMI index, compiled by Bank Hapoalim and the Israeli Purchasing Managers' Association, had reached a high of 59.1 in December 2010.
The PMI hit a low of 28.5 in January 2009.
Israel's economy grew 3.1% t in 2012 and is expected to grow 2.8% in 2013, excluding natural gas production.
The shekel earlier in April hit a 17-month low versus the dollar, prompting central bank intervention.