WASHINGTON - Sales of previously owned U.S. homes jumped last month to their highest level in nearly three years, the latest sign that the economic recovery was gaining steam, after growing below expectations in the third quarter.

The National Association of Realtors said on Tuesday existing home sales increased 7.4 percent to an annual rate of 6.54 million units, the fastest pace since February 2007, from 6.09 million units in October. The rise was above market expectations for 6.25 million units.

Separately, the Commerce Department's final estimate showed gross domestic product grew at a 2.2 percent annual rate in the third quarter instead of the 2.8 percent pace it reported last month. Markets had expected GDP, which measures total goods and services output within U.S. borders, to be unrevised at a 2.8 percent.

The economic reports of late have been very upbeat. Most people are looking now for 3.5 to 4.0 percent GDP growth in the fourth quarter, and the housing numbers are the icing on the cake, said Bruce Bittles, chief investment strategist at Robert W. Baird & Co in Nashville, Tennessee.

U.S. stocks extended gains on the data, rallying for a third straight trading day, while prices for government debt were lower for the second day. The U.S. dollar continued to firm against both the euro and yen.

HOUSING MARKET STABILIZING

The housing market, the main trigger of the most painful U.S. recession in 70 years, is stabilizing, analysts said. The hope is that an improving house market will improve the psychology of households that has been shattered by the highest unemployment in a quarter century.

Even more encouraging, the decline in house prices is fading. The median home price fell 4.3 percent in November, from a year-ago, to $172,600, the smallest price drop since November 2007, the National Association of Realtors said.

A separate report from the U.S. Federal Housing Finance Agency showed home prices rose 0.6 percent in October from September.

DEFINITIVE TURN IN HOUSING

We have established a definitive turn in the housing market, but it continues to be reliant in government support. We should see a passing of baton from a government-supported housing rebound to one that is self-sustaining, said Richard DeKaser, president of Woodley Park Research in Washington.

In addition, while the economic expansion in the July-September period was below expectations, it was still the fastest pace since the third quarter of 2007 and ended four straight quarters of decline in output.

Growth was boosted by government stimulus programs, including the popular cash for clunkers and tax credit for first-time home buyers, and debate continues to rage over the sustainability of the recovery once government support wanes.

However, data such as retail sales, business inventories and the trade balance strongly indicate the economic growth pace picked up speed in the fourth quarter.

Last week, the Federal Reserve gave a cautiously upbeat assessment of the economy and promised to hold overnight lending rates near zero for an extended period to aid the economic recovery.

I expect the fourth quarter (GDP) will still be strong with retail sales better-than-expected, but business spending is still a wildcard. There is a lot of cash, but I'm not sure if the business spending is there yet, said Christopher Low, chief economist with FTN Financial in New York.

Growth in the third quarter was held back by weak business spending and a slightly aggressive liquidation of inventories.

Business spending fell at a 5.9 percent rate instead of 4.1 percent, the department said.

While the economy has turned the corner, the effects of the recession continue to reverberate. Ford Motor Co said Monday it was offering its 41,000 U.S. factory workers buyouts and early retirement offers in a bid to reduce its payroll costs to achieve profitability by 2011.

Nonresidential building activity dropped 18.4 percent in the third quarter rather than 15.1 percent, a reflection of the troubles in the commercial property market. That shaved 0.68 percentage points off GDP.

Imports jumped 21.3 percent, the biggest gain since the first quarter of 1984, instead of 20.8 percent, while exports grew 17.8 percent. That left a trade gap which lopped off 0.81 percentage points from GDP in the last quarter.

While consumer spending was slightly revised down, it helped to offset the drag on growth from a steep drop in business investment. Consumer spending, which normally accounts for about 70 percent of U.S. economic activity, grew at a 2.8 percent annual pace in the third quarter rather than the 2.9 percent rate the government estimated in November.

Businesses liquidated accumulated stocks of unsold goods more aggressively than previously thought, but analysts said this bode well for fourth quarter GDP. Business inventories fell $139.2 billion in the third quarter, rather than the $133.4 billion the government estimated in November.

Inventories plunged a record $160.2 billion in the second quarter. The change in inventories added 0.69 percentage points to real GDP in the third quarter.

The rundown in the inventory cycle slowed considerably in the fourth quarter. Firms may even be restocking. Inventories are on course to add around 3 percentage points to overall GDP growth in the fourth quarter, said Paul Dales, U.S. economist at Capital Economics in Toronto.

The GDP report also showed after tax corporate profits grew 12.7 percent in the third quarter, instead of the 13.4 percent forecast last month. It was still the largest gain since the first quarter of 2004, but below market expectations for 13.4 percent.

(Additional reporting by Corbett Daly in New York and Richard Leong in New York)

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