Sales of previously owned U.S. homes jumped last month to their highest level in more than 2-1/2 years, but a fall in an economic activity gauge was a reminder recovery from recession would be patchy.

The National Association of Realtors said on Monday sales of existing home sales surged a record 10.1 percent month-over-month to an annual rate of 6.10 million units as buyers rushed to take advantage of a popular tax credit for first-time buyers that had been scheduled to end this month.

It was the highest since February 2007 and beat market expectations for a 5.70 million-unit pace. Sales in September were at a 5.54 million-unit rate.

Although the data are biased higher from policy measures, we do believe this sharp gain signals pent up demand and a willingness to purchase homes, which is a good sign for the sustainability of the housing recovery, said Michelle Meyer, an economist at Barclays Capital in New York.

Graphic on existing home sales and new construction: http://graphics.thomsonreuters.com/119/US_EXHOMS1109.gif

U.S. stock indexes extended gains on the housing data, which shifted attention away from an earlier report from the

Federal Reserve Bank of Chicago showing its National Activity Index slid to -1.08 from -1.01 in September.

U.S. Treasury debt prices eased as the market prepared for another huge dose of supply this week.

The National Activity Index's three-month moving average, CFNAI-MA3, decreased to -0.91 in October from -0.67 in September, declining for the first time in 2009.

According to the Chicago Fed, a move below -0.70 in the three-month moving average following a period of economic expansion indicates an increasing likelihood a recession has begun.

This development will likely feed into fears the economic recovery that started in the third quarter may lose some momentum once government stimulus wanes, given high unemployment which is crimping consumer spending.

Analysts are cautiously hoping a sustained housing market recovery will help improve the psychology of households, which has been shaken by an unemployment rate of 10.2 percent, the highest in 26-1/2 years.

EXISTING HOME SALES BOTTOMED

The NAR said data on Monday, which showed broad-based gains in the largest segment of the housing market, was proof that the decline in purchases of existing homes had bottomed.

Home prices are almost there. We are seeing a less of a decline in house values, said Lawrence Yun, NAR's chief economist.

Many buyers have been rushing to beat the deadline for first-time buyer credit that was scheduled to expire at the end of this month, and similarly robust sales may be occurring in November.

Distressed transactions accounted for 30 percent of sales last month and continued to weigh on house prices. First-time buyers made up a third of sales in October.

The national median home price fell 7.1 percent from October last year, the smallest decline in over a year, to $173,100. Homes in foreclosure typically sell for 15 to 20 percent less than traditional homes.

The housing market is slowly mending after a three-year decline, which contributed to tipping the U.S. economy into its worst recession in seven decades. Housing construction contributed to economic growth in the third quarter for the first time since 2005.

Recovery is being supported by the $8,000 tax credit for first-time buyers, low mortgage rates and falling house prices. The government this month extended the incentive into next year and added a $6,500 credit for home owners buying a new residence. It had been due to expire on November 30.

Purchases by the U.S. Federal Reserve of mortgage-related assets have helped to push home loans down, boosting the affordability of house and aiding the sector's recovery.

On Sunday, St. Louis Federal Reserve Bank President James Bullard said the U.S. central bank should keep its mortgage-related asset purchase program beyond a scheduled expiration in March.

The Fed, which cut interest rates to near zero last December, has committed to keep borrowing costs ultra low for an extended period of time.

In October, sales of single-family homes -- the biggest segment of the market -- rose 9.7 percent to an annual rate of 5.33 million units. Condominium and co-ops increased 13.2 percent to a 770,000-unit rate.

Sales were up in all four regions of the country. Prices rose 1.1 percent in the Midwest, which didn't see the same boom as the rest of the country. They declined in the other three. The rise in the Midwest was the first price increase in any region since November 2008.

The inventory of existing homes for sale in October fell 3.7 percent to 3.57 million units from the previous month, NAR said. At October's sales pace, that represented a supply of 7.0 months, the lowest in 2-1/2 years, from September's revised 8.0 months.

For a graphic on existing home sales click on: http://graphics.thomsonreuters.com/119/US_EXHOMS1109.gif

(Additional reporting by Corbett B. Daly in Washington, Burton Frierson and Julie Haviv in New York; Editing by Andrew Hay)