The National Association of Realtors said on Tuesday its Pending Home Sales index, based on contracts signed in December, rose 1.0 percent to 96.6 after a steep drop in November when a boost from an initial tax credit for first-time buyers ebbed.

The gain in the index, which leads sales of previously owned homes by one to two months, was in line with market forecasts. Compared to December 2008, it was up 10.9 percent.

The monthly rise in the Pending Home Sales index was not as large as in the months prior to the November slide and suggested existing home sales were flat to slightly weaker in January, analysts said. Existing home sales fell to their slowest sales pace in four months in December.

"There is still no evidence of a significant rebound in home sales. The pending home sales index implies existing home sales will be little changed between December and January," said Abiel Reinhart, an economist at JPMorgan in New York.

Separately, the percentage of homes standing empty rose to 2.7 percent in the final three months of 2009 from 2.6 percent in the third quarter, the Commerce Department said. The rate has risen for the last two quarters.

Still, investors were encouraged by the rise in pending homes sales after November's slump. U.S. stocks surged on the report and on reassuring corporate earnings, helping the S&P 500 index (.SPX) cap its best two-day run-up since October.

U.S. government debt prices rose ahead of a refunding announcement later in the week. The dollar fell broadly.

Monthly housing data has been distorted by the first tax credit, which saw prospective home owners pushing forward purchases to beat the initial November deadline.

Although the tax credit was subsequently expanded and extended until June, a lull in sales followed, causing economists to question the sustainability of the housing market's recovery without government support.

TIGHTER LENDING STANDARDS

There are worries that the housing market, at the center of the worst economic downturn since the Great Depression, could take a step back and harm the broader economic recovery.

The Federal Reserve said on Monday most U.S. banks stopped raising the bar for borrowers at the end of last year and even made it easier for consumers to get some loans.

The U.S. central bank, however, also noted banks continued to tighten standards on residential real estate loans in the fourth quarter, a factor that could generate some bumps for the housing recovery.

Demand for mortgages has been erratic and new home sales also fell in December. Home building slowed sharply in the fourth quarter and made a smaller contribution to growth than in the prior period, the government said last week.

While the housing market recovery is showing some signs of strain, other areas of domestic demand such as auto sales continue to chart a path of steady improvement.

Auto sales in January rose more than 6 percent from the prior year to about 10.7 million units, according to data from major automakers.

General Motors reckoned a massive recall by Toyota Motor Corp of its top-selling vehicles had cut 200,000 vehicles from the sales rate.

The January sales rate was down from 11.2 million units in December.

The extension and expansion of the tax credit for first-time buyers is expected to buoy sales in the months ahead. Analysts do not expect them to set the same pace as that achieved during the initial program.

"The January to November program likely borrowed some strength from the future as prospective buyers rushed into the market before its expiration, arguing for a moderation in the pace of home sales," said Anna Piretti, an economist at BNP Paribas in New York.