Another report on Thursday showed an index of leading indicators, a gauge of the economy's future prospects, fell last month, consistent with views the recovery was cooling and the slowdown could persist through the end of the year.

With the data stream continuing to be weak, fears have escalated that the economy may be slipping back into recession, but both private economists and Federal Reserve officials see the recovery still intact.

"The soft patch continues. We are above stall speed now and losing momentum," said Robert Dye, a senior economist at PNC Financial Services in Pittsburgh. "If we get too close to stall speed for too long, we are likely to fall below that and that's where the risk of a double-dip recession comes in."

Existing home sales fell 5.1 percent to an annual rate of 5.37 million units, the National Association of Realtors said, but better than market expectations. The median home sales price in June was $183,700, a 1 percent increase from the prior year.

A separate report from the Labor Department showed initial claims for state unemployment benefits rose 37,000 to 464,000 last week, more than erasing a decline in the prior week. The rise exceeded market expectations for a reading of 445,000.

Given that the housing data was not as bleak as financial markets had feared, stocks on Wall Street rallied. Investors were also cheered by strong earnings from companies such as Caterpillar Inc, diversified manufacturer 3M Co and package deliverer United Parcel Service Inc.

Both Caterpillar and UPS raised their full-year outlooks, but remained cautious on the domestic economy.

All three main U.S. stock indexes were up more than 2 percent in afternoon trade, while prices for safe-haven government bonds fell. The U.S. dollar fell against the euro after data from the single monetary area eased fears of a double-dip recession there.

Euro zone industrial orders rose in May at their fastest annual rate in 10 years, while the private sector grew unexpectedly this month.

JOB GROWTH SLOWED

Job growth in the United States has slowed after strong gains early in the year, crimping household spending and holding back the economy's recovery from the most painful recession since the 1930s.

In congressional testimony on Wednesday and Thursday, Fed Chairman Ben Bernanke described the outlook as "unusually uncertain" and said the U.S. central bank stood ready to take further steps to aid the economy if needed.

"We are ready and we will act if the economy does not continue to improve if we do not see the kind of improvements in the labor market that we are hoping for and expecting," he told the House of Representatives Financial Services Committee on Thursday.

However, Bernanke said the U.S. central bank did not expect the economy to stall, remarks that were echoed by New York Federal Reserve Bank President William Dudley.

"The road to recovery is turning out to be a bit bumpy as relatively weak consumer spending and the ongoing problems in financial markets are keeping growth far less robust than we would like," Dudley said. "We think the risk of double dip is quite low.

The claims report covered the survey week for government's closely monitored employment report for July, which is scheduled for release on August 6.

A third report on Thursday showed the Conference Board's index of leading economic indicators slipped 0.2 percent in June after rising 0.5 percent in May.

"The indicators point to slower growth through the fall. Improvement in the industrial core of the economy will moderate as inventory rebuilding slows," said Ken Goldstein, an economist at the Conference Board.

While the number of people still receiving unemployment benefits after an initial week of aid dropped sharply to 4.49 million in the week ended July 10, it likely reflected people falling off the benefit rolls rather than finding work