Sales of previously owned U.S. homes touched a five-month high in April amid a late rush to take advantage of a homebuyer tax credit, but a jump in houses on the market pointed to a slow recovery.

While analysts generally expect a lull in homebuying over the next few months, they stressed that a strengthening economy and improving labor market should prop up the housing sector in the absence of more government aid.

April sales of existing homes rose 7.6 percent month-over-month to an annual rate of 5.77 million units, the National Association of Realtors said on Monday, beating market expectations of a 5.65 million-unit pace.

There is going to be a retrenchment in home sales after the tax credit is over. We are expecting that by the end of the year, sales will rise again on the strength of economic growth and we see job growth picking up, said Celia Chen, a director at Moody's Analytics in West Chester, Pennsylvania.

To qualify for the federal tax credit, buyers had to sign contracts by April 30 and close on the home by the end of June. Since existing home sales are measured at the time of closing, sales are likely to remain high through next month.

U.S. financial markets ignored the data, with investors focusing on debt troubles in Europe as Spain bailed out a local bank. On Wall Street, stocks fell and the Dow Jones industrial average <.DJI> closed at its lowest level since February 10.

Prices for U.S. government debt rose, while the dollar firmed against the euro.

Although data continue to point to a strengthening in the U.S. economy, budget troubles in Europe are casting a shadow over the recovery. Economists see a limited impact on the domestic economy, but worry a sustained decline in share prices could crimp consumer spending.

The sovereign debt crisis has reawakened investor fears of a financial meltdown. It is unlikely that the domestic economy will suffer substantially from the associated dislocations in the markets, said Steven Ricchiuto, chief economist at Mizuho Securities in New York.

White House economic adviser Lawrence Summers said the economic outlook had improved markedly, but cautioned that the European debt crisis had introduced uncertainty into the global economic outlook. He also expressed concern about the near 10 percent domestic unemployment rate.

HOME INVENTORY RISES

Despite the surge in sales last month, the inventory of existing homes for sale in April jumped 11.5 percent to 4.04 million units, the highest since July. At April's sales pace, that represented a supply of 8.4 months, compared with March's 8.1 months.

Although the Realtors group attributed the rise in the supply of homes on the market to seasonal factors, analysts said the gain in inventory would be a drag on house prices.

Supply is now rising quite quickly as would-be sellers see a chance to move their property. We remain nervous that this wave of supply will push prices back down in the second half of the year, said Ian Shepherdson, chief U.S. economist High Frequency Economics in Valhalla, New York.

The national median home price rose 4 percent from April last year to $173,100 -- the highest since September. Prices were up 2.1 percent from March.

An S&P/Case-Shiller report on Tuesday is expected to show prices in 20 cities fell a seasonally adjusted 0.3 percent last month after slipping 0.1 percent in March, but they are seen increasing 2.4 percent from a year ago.

The U.S. economy has now grown for three straight quarters following its worst recession in 70 years and mortgage rates remain near record low levels. But the housing market's recovery is being held back by painfully high unemployment and a tide of home foreclosures.

Foreclosed properties accounted for a third of sales last month, the NAR said. First-time buyers constituted 49 percent of transactions.

Data from the Mortgage Bankers Association last week showed demand for loans to buy homes slumped to a 13-year low in the aftermath of the deadline to sign contracts.

However, the NAR's chief economist, Lawrence Yun, said there was no strong correlation between mortgage applications and home sales, pointing out that 26 percent of sales last month were cash purchases. Historically, this would be 10 percent or less, he said.

The improvement in sales last month was broad-based, with sales of both single-family homes and condominiums and co-ops touching five-month highs.

Highlighting the strengthening economic recovery, a measure of national economic activity rose last month to its highest level since December 2006. The Chicago Federal Reserve Bank said its national activity index rose to 0.29 from 0.13 in March.

A reading above zero indicates the economy is growing above trend. However, the three-month moving average showed there was some economic slack, suggesting subdued inflationary pressure over the coming year, the Chicago Fed said.

(Additional reporting by Caren Bohan; Editing by Dan Grebler)

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