Birmingham City Council's performance has improved significantly although much more work is needed to ensure that services fully meet people's needs, according to Government-appointed inspectors.
The annual Audit Commission study of the council's progress during 2004/05 produced an unusually positive report, noting rapid progress in social services, housing and an "excellent" benefits service.
The commission's Comprehensive Performance Assessment, based on a new harder criteria for local authorities, gave Birmingham two stars for the first time and said there were promising prospects for further improvement.
Previous inspections in 2001 and 2003 resulted in zero-star ratings for housing and social services.
On this occasion there was improvement across all core service areas, with 56 per cent of performance indicators heading upwards.
Staff sickness levels fell from an average of 10.4 days per employee to 9.8, the best of any major city council.
District Auditor John Gregory said: "Overall, the plans which the council now have in place provide a sound basis for future improvement.
"Our work on regeneration confirmed that the council and its partners have effective strategic plans which are designed to bring extensive economic benefits to the city."
Mr Gregory, in his annual letter of report to the council, praised changes in the built environment including the development of Eastside, the A38 Technology Corridor and the North-west Birmingham hub.
Mr Gregory added: "While progress has been made in adult social care, urgent action is still needed to improve services for people with learning disabilities."