WASHINGTON - Pending sales of previously owned U.S. homes fell more sharply than expected in November, but a surge in new factory orders offered assurance the economic recovery remained on track.

In a further boost to the economy, initial results from automakers on Tuesday showed December's vehicle sales on track to be the strongest since the summer's cash for clunkers trade-in incentive program.

It goes along with what we've been seeing, a slight improvement in the economy overall and it's gaining some breadth ... particularly on the manufacturing level, said Bruce Bittles, chief investment strategist at Robert W. Baird & Co. in Nashville.

The National Association of Realtors' Pending Home Sales Index, based on contracts signed in November, dropped 16 percent from October to 96.0 after rising for nine straight months.

Analysts, who had looked for a decline of only 2 percent, blamed the drop on the end of a rush to beat the original expiration of a popular tax credit. They said the fact the index was up 15.5 percent from its year-ago level indicated the housing market continued to heal.

A separate report from the Commerce Department showed new orders at U.S. factories rose 1.1 percent in November. It was their third straight monthly increase and financial markets had expected a 0.5 percent gain.

The data came a day after a report showed factory activity in December rose to its highest level since April 2006.

The slump in pending home sales, which lead actual sales by a month or two, rekindled concerns the housing market could falter once government support is withdrawn.

The bullish factory orders data partially offset the weak housing report, hoisting the benchmark Standard & Poor's 500 Index .SPX to a 15-month closing high. Prices for U.S. government debt rose for a second day, while the U.S. dollar suffered its biggest one-day fall against the yen in a month.

TAX CREDIT CAUSES VOLATILITY

Home sales have been boosted by an $8,000 tax credit for first-time home buyers. The popular tax credit, which was originally scheduled to expire at the end of November, has been expanded and extended to mid-2010.

For a graphic detailing pending home sales, see link.reuters.com/sez79g

The tax credit has caused volatility in November data and sent conflicting signals on the housing sector's recovery from a collapse that sent the economy reeling into its worst recession since the 1930s.

Reports last month showed sales of previously owned homes continued to rise in November, but purchases of new homes slumped. Mortgage rates have steadily risen in recent weeks and the 30-year rate hit its highest level since August last week.

Sales should rebound going forward. Nevertheless, this report suggests that the recent strength of housing demand is still far from becoming self-sustaining and that the housing market remains overly dependent on government support, said Anna Piretti, an economist at BNP Paribas in New York.

A Federal Reserve program to buy $1.25 trillion of mortgage-backed securities that had helped keep 30-year mortgage rates near record lows is scheduled to end in March.

Citing Fed officials, Market News reported the U.S. central bank was discussing re-entering the MBS market later this year if its buying power was needed to hold down interest rates.

In a sign the economic recovery that started in the third quarter of 2009 is gaining momentum, initial results on new vehicle purchases pointed to overall sales rising to an annual rate of around 11.5 million units in December.

Ford Motor Co (F.N) posted a 33 percent sales gain last month.

In the Commerce Department report, a closely watched proxy for business spending plans rose sharply in November.

Orders for non-defense capital goods, excluding aircraft, increased 3.6 percent after dropping 2.1 percent the prior month, the department said.

It tells you the manufacturing sector continues to whir along and it probably means that you're going to get GDP growth in the fourth quarter of about 4 percent, said Ward McCarthy, chief financial economist at Jefferies & Co. in New York.

(Additional reporting by Lisa Lambert in Washington and Kevin Krolicki in Detroit; Editing by Dan Grebler)