U.S. home prices rose in May for the first time in three years, the latest sign suggesting the battered housing market is stabilizing, but a weakening job market hit consumer confidence in July and could prevent near-term economic recovery.

The most severe housing slump since the Great Depression helped propel the U.S. economy into recession and its turnaround is considered essential.

Potential home buyers afraid of committing to a fast- depreciating asset have been clamoring for signs of stabilization in house prices.

Home prices have plunged more than 32 percent on average from their 2006 peaks, yet the pace of the annual declines slowed in May for the fourth straight month, according to Standard & Poor's/Case-Shiller home price indexes on Tuesday.

This could be an indication that home price declines are finally stabilizing after tumbling to 2003 levels, David M. Blitzer, chairman of the index committee at S&P, said in a statement.

Janet Yellen, the president of the Federal Reserve Bank of San Francisco, told a meeting of Oregon and Idaho bankers on Tuesday that we glimpse the first solid signs ... that economic growth may be poised to resume. Indeed, I expect that to happen sometime this year.

WEAK JOB MARKET SOURS CONSUMERS' MOOD

But rising unemployment and wage cuts are straining consumer optimism and keeping many buyers out of the housing market, impeding spending and prospects for economic rebound.

People are getting a bit discouraged. Jobs are not coming as quickly as expected, said John Silvia, chief economist at Wells Fargo in Charlotte, North Carolina. This won't be a V-shaped recovery for either the economy or the jobs market.

In May, the index of house prices in 20 metropolitan areas rose 0.5 percent from April, after a 0.6 percent drop the month before. The long slide was expected to persist, with a 0.5 percent drop in May forecast in a Reuters poll.

Those figures are not seasonally adjusted. Once adjusted, prices showed a 0.2 percent monthly dip in May, which was still a dramatic slowdown from the recent trend, according to Barclays Capital.

The pressures are all working in alignment to support that we're at the turning point in the worst housing market since the Great Depression, said Steve Hagenbuckle, managing principal for TerraCap Partners, a distressed real estate private equity fund in Cape Coral, Florida.

Affordability is at all-time highs, inventories are shrinking, there's competition for properties, and we're not building as much new product to compete with the existing homes, he said.

Sales of both new and existing U.S. homes rose in June for the third straight month, spurred by low prices and mortgage rates as well as first-time buyer tax credits.

Still, caution is warranted as long as the U.S. unemployment rate keeps rising, economists advised. That rate is at its highest in nearly 26 years and is headed to double-digit levels.

For a rebound, consumer confidence needs to improve, foreclosures need to start falling from their record pace and potential buyers need to have a sense that it won't be even cheaper to purchase if they keep waiting.

Consumer confidence, however, fell more than expected this month because of the worsening job market.

Unfortunately, it is still too early to sound the 'all clear' when it comes to the recession watch, Mohamed El-Erian, chief executive of bond giant Pacific Investment Management Co., said on Tuesday.

The U.S. Conference Board's consumer sentiment index fell to 46.6 in July from 49.3 in June, according to data published on Tuesday. A reading of 49 was forecast in a Reuters survey.

The eroding sentiment came as the percentage of Americans saying jobs are hard to get increased and those who thought jobs were plentiful fell to its lowest in more than a quarter century.

Consumers are feeling no love in this recovery, said Boris Schlossberg, director of foreign exchange research at GFT in New York. Consumers are still concerned about the labor market and their own security.

U.S. Treasury debt prices rose initially on the soft consumer report, but fell after the government sold $42 billion of notes, part of the record $115 billion of Treasury debt being issued this week.

U.S. stocks mostly slipped on the consumer confidence drop and poor corporate results. But in early afternoon trading, the Nasdaq turned positive as buyers bought biotech stocks a day after Amgen's strong earnings. The dollar bounced from this year's lows in a push toward safe-haven assets.

(Additional reporting by Richard Leong, Gertrude Chavez-Dreyfuss, Burton Frierson, Jennifer Ablan and Ros Krasny; Editing by Jan Paschal)

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