Sales of previously owned homes suffered a record drop last month as the boost from a popular tax credit waned, raising doubts the housing market recovery can be sustained without government support.

The National Association of Realtors said on Monday that existing home sales fell 16.7 percent in December to an annual rate of 5.45 million units. It was the sharpest decline on records dating to 1968 and the slowest sales pace since August.

Analysts, who had expected a 5.90 million unit pace, said the slump month underscored the degree to which the housing market recovery was reliant on government aid.

Today's numbers clearly indicate that the rebound in housing demand observed so far has been largely supported by government programs and therefore that the recovery is far from becoming self-sustaining, said Anna Piretti, an economist at BNP Paribas in New York.

U.S. stock indexes briefly dipped on the data, but rebounded as attention shifted to improving prospects for Ben Bernanke to win Senate backing for a second term as Federal Reserve chairman. Rising stocks clipped U.S. government bonds' safe haven appeal, sending debt prices lower.

Housing is recovering from a three-year slump, driven by a tax credit for first-time buyers and low mortgage rates. The tax credit, which had been scheduled to end last November was expanded and extended until June this year.

Prospective home buyers rushed through sales to get the credit before it expired. That created a surge in November sales and a December lull once buyers saw they had an extra 7 months to take advantage of the benefit.

Analysts said the tax credit extension should boost sales in months ahead but saw risks if it were phased out. Data ranging from pending home sales to builders sentiment have raised concerns the housing market, at the core of the worst U.S. downturn since the 1930s, might be slipping back.

We're becoming increasingly concerned that the housing recovery will falter once it is removed, said Paul Dales, U.S. economist at Capital Economics in Toronto.

WILL RECOVERY FALTER?

According to NAR, first-time home buyers accounted for 43 percent of the sales in December, down from 51 percent the previous month. Distressed transactions made up 32 percent of the sales.

Sales could improve again in the near-term as a result of the extension of the homebuyer tax credit and what we expect to be a near-term return to job growth, said Abiel Reinhart, an economist at JPMorgan in New York.

By the middle of the year, however, the housing market will run into some more headwinds as the tax credit expires and mortgage rates probably rise.

Mortgage rates have been depressed by the Fed's program to buy mortgage-related securities in the market. The U.S. central bank is scheduled to end the program in March.

Existing home sales for the whole of 2009 rose 4.9 percent, the Realtors group said,. However, prices fell 12.4 percent, which NAR said was probably the largest annual drop since the Great Depression.

Still, there were some encouraging signs. The median home price rose 1.5 percent from December 2008 to $178,300. That was the first year-on-year increase since August 2007 and the largest rise since May 2006.

The inventory of homes available for sale last month fell to 3.29 million units, the lowest since March 2006. At December's sales pace, that represented 7.2 months' worth of supply.

Analysts argue that reducing the supply of homes for sale on the market is critical for the sector's recovery.

Sales fell last month in all four regions of the country.

For a graphic comparing existing home sales and the U.S. mortgage market, see: http://graphics.thomsonreuters.com/0110/US_EXHS0110.gif

(Writing by Lucia Mutikani; Editing by Andrew Hay)

Ben Bernanke BNP Paribas