Factory output in the U.S. central Atlantic region dropped to a two-year low in August and new home sales hit a five-month low in July, the latest signs to suggest the economy is at risk of stalling.

The Richmond Federal Reserve Bank said on Tuesday its index of factory activity in its district fell to minus 10 from minus 1 in July as new orders and shipments weakened sharply.

It was the lowest reading since June 2009.

While the survey covers only a small portion of U.S. manufacturing, it follows a report last week that showed a steep decline in factory activity in the mid-Atlantic region, signaling a potential shrinking in the sector that has shouldered the economy's recovery.

The manufacturing sector was one of the most consistent pockets of strength in this recovery and all of a sudden it seems to be taking a very severe beating that goes beyond the supply chain disruptions related to the Japan earthquake, said Anthony Karydakis, chief economist at Commerzbank in New York.

The Institute for Supply Management's index of national manufacturing activity stood at 50.9 in July and economists said it would likely fall below the 50 mark in August, which would indicate a contraction.

The index has been steadily declining since March, but that weakness had been blamed mainly on supply chain disruptions from Japan. The August survey will be published on September 1.

The Philadelphia Fed said on Thursday that an index covering factory activity in its region dropped to a near 2-1/2 year low in August.

That survey covered businesses in eastern Pennsylvania, southern New Jersey and Delaware, while the report from the Richmond Fed covered the District of Columbia, Maryland, North Carolina, South Carolina, Virginia and most of West Virginia.

Analysts cautioned against interpreting the regional weakness as a sign the economy was already in recession.

RECESSION RISKS UP

The Philly Fed survey has a very small correlation with the national ISM index and much of the decline this month reflected the extreme turmoil in financial markets, which has eroded both business and consumer sentiment.

Our forecast is for ISM manufacturing index to fall below the 50 mark for the first time since mid-2009, though it will remain above the 46 mark which is consistent with overall economic contraction, said Millan Mulraine a senior U.S. macro strategist at TD Securities in New York.

Economists estimate the odds of a contraction in overall economic activity as high as 50 percent.

Those risks were reinforced by a Commerce Department report showing new single-family home sales slipped 0.7 percent in July to a 298,000-unit annual rate, the lowest since February.

Economists polled by Reuters had forecast sales at a 310,000-unit rate. In the 12 months through July, new home sales rose 6.8 percent.

July's weak sales pace left the supply of new homes on the market unchanged at 6.6 months' worth.

The recovery cannot count on the housing sector adding much to growth, said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

Despite the soft data, U.S. stock prices rallied on speculation that a string of weak data could prompt Federal Reserve Chairman Ben Bernanke to announce stimulative measures to support the economy at a gathering of gathering global central bankers in Jackson Hole, Wyoming, later this week.

Bernanke will deliver a keynote address on Friday morning. Traders expecting the Fed chief to outline plans for a new round of bond purchases are likely to be disappointed.

Instead, he is most likely to outline gradualist measures, such as how the Fed could tweak its balance sheet as a way to put further downward pressure on medium- and long-term interest rates.

(Additional reporting by Jason Lange and Glenn Somerville, editing by Neil Stempleman)