Factory activity in the Mid-Atlantic region rebounded in October and the number of Americans claiming new jobless benefits fell last week in fresh signs that the economy was likely to duck a new recession.

Optimism over the economy was tempered, however, by other data on Thursday showing a drop in sales of previously owned homes and only a small rise in a gauge of future growth.

The numbers we have seen today provide some hints that the domestic economy is doing a little bit better, even with the challenges that are unfolding in Europe, said Michael Strauss, chief economist at Commonfund in Wilton, Connecticut.

Initial claims for state unemployment benefits slipped 6,000 to 403,000 last week, the Labor Department said. A four-week average, which smoothes out weekly volatility to give a better view of trends, hit its lowest level since April.

Separately, the Philadelphia Federal Reserve Bank's business activity index rebounded to 8.7 in October, the highest reading in six months, from minus 17.5 in September.

A reading above zero indicates factory activity is expanding in the region, which covers eastern Pennsylvania, southern New Jersey and Delaware.

U.S. stocks initially rose on the data, but surrendered most gains on nagging doubts over whether European leaders would decisively deal with the euro zone debt crisis at a summit this weekend. Prices for U.S. Treasury debt were little changed while the dollar was a touch weaker against a basket of currencies.

Fears had been mounting that the sickly U.S. economy was heading back toward recession after growth wobbled in the first half of the year and after consumer confidence plunged in August amid signs both the United States and Europe were having trouble coming to terms with their huge debts.

But the recent stream of data, including figures on retail sales and trade, suggest output sped up in the third quarter.

Analysts estimate U.S. gross domestic product grew at an annual pace of anywhere between 2.3 and 2.7 percent, a sharp step up from the second quarter's tepid 1.3 percent rate.

There is little evidence the economy is ready to enter a downturn based on the Philadelphia Fed (data), said Joseph LaVorgna, chief U.S. economist at Deutsche Bank in New York.

JOBS MARKET TONE IMPROVING

That view was also underscored by the four-week moving average of initial jobless claims. The claims data covered the survey week for the government's closely watched nonfarm payrolls count for October.

Initial claims dropped 25,000 between the September and October survey periods, suggesting a step-up in nonfarm employment after payrolls increased 103,000 last month.

After spiking in mid-September, jobless claims appear to have settled near the 400,000 mark that is usually associated with some improvement in the jobs market.

Weak unemployment is a thorny issue for the Federal Reserve, which is weighing further options to boost output and lower the jobless rate after slashing interest rates to near zero and pumping about $2.3 trillion into the economy.

On Thursday, St. Louis Fed President James Bullard acknowledged the improved tone in economic data but his counterpart at the Cleveland Fed, Sandra Pianalto, did not believe growth would pick up soon. For more see

While most parts of the U.S. economy are plodding along, the housing market continues to show little signs of life, however.

Sales of existing homes dropped 3.0 percent to an annual rate of 4.91 million units in September, the National Association of Realtors said.

In another report, the Conference Board said its index of leading economic indicators edged up 0.2 percent in September, pointing to continued sluggish growth. Still, it warned that the economy faced a 50 percent chance of recession whereas a month ago it said recession risks were lower than that.

Most economists, however, see a lower chance of recession, and signs of continued manufacturing expansion have bolstered hopes another downturn can be avoided.

Factories in the Mid-Atlantic region this month reported growth in order books after shrinkage for two straight months. Shipments rose too and there was an increase in unfilled orders, although employment slowed from September.

Still, manufacturers remain leery on the economic outlook.

Diversified manufacturer Danaher Corp, air conditioner maker Ingersoll Rand Plc and electrical products company Cooper Industries Plc all reported higher-than-expected earnings but were guarded about the fourth quarter.

Clearly, we're seeing some moderation in the economy, Danaher CEO Larry Culp said. (But) I don't think we'll see anything like an '08, '09 collapse.

(Additional reporting by Pedro da Costa and Jason Lange in Washington and Nick Zieminski in New York; Editing by James Dalgleish)

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