SYDNEY (Reuters) - A measure of Australian business conditions hit the highest in four years in July as firms reported a sharp pick up in sales and profitability, though many remained reluctant to hire new workers.

National Australia Bank's survey of more than 400 firms showed its index of business conditions jumped 6 points to stand at +8 in July, the highest since early 2010 and an upbeat sign for the economy in the third quarter.

The report's index of business confidence also improved, rising 3 points to +11 led by strength in home construction and retailing.

The survey's measure of sales climbed 7 points to +14, while that for profitability surged 7 points to +10. The employment index added 3 points but was still soft overall at 0.

The pick up in activity also looked to have legs with the index of forward orders rising 4 points to +5, well above its long-run average.

"Firms still appear unfazed by the Federal government's 'tough budget', possibly taking comfort in the bounce back in consumer confidence," said NAB's chief economist, Alan Oster.

"Stronger sales and profits are driving the trend, but the recovery continues to be relatively jobless with the employment index seeing more moderate gains."

The improvement would be welcome news to the Reserve Bank of Australia (RBA) which has held interest rates at record lows of 2.5 percent for an entire year to support the economy as a long boom in mining investment fades.

The central bank is a close watcher of the NAB survey, which has a good track record as a leading indicator of economic activity.

The survey showed capacity utilization jumped notably in July to 81.0 percent, following a sharp fall in June, reaching its highest level since early 2012.

Measures of price pressures accelerated a little in July. Labour costs were up 1 percent at a quarterly rate, in part due to a rise in the minimum wage.

Final product prices remained subdued, though retail prices did pick up somewhat.

(Reporting by Wayne Cole; Editing by Shri Navaratnam)