But downward revisions to sales estimates for April and May in Monday's report left in place a picture of a weak housing market and perceptions that economic growth moderated somewhat in the second quarter.

Sales of new single-family homes vaulted 23.6 percent to a 330,000 unit annual rate, the Commerce Department said. Still, the sales pace last month was the second lowest since records started in 1963.

"We can't take too much joy in one month's figure. The roadblocks to a healthy housing market are high, the most important one being the still high jobless rate," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

The percentage increase last month was the largest since May 1980, and it partially unwound May's historic 36.7 percent drop as the U.S. housing market was roiled by the expiry of a popular tax credit that boosted sales. Analysts polled by Reuters had forecast new home sales rising to a 320,000-unit pace last month from May's previously reported 300,000 units.

New home sales account for only a fraction of the total U.S. housing market.

The report, together with package delivery and business services company FedEx Corp's upgrading of its quarterly and full-year earnings forecasts, prompted a rally on Wall Street.

Each of the three major U.S. stock indexes gained 1 percent for the day, with the Standard & Poor's 500 at 1,115.01 -- just a fraction of a point shy of the break-even point for the year. The Dow Jones industrial average is back in the black for the year. The Nasdaq, which edged back into positive territory for the year on Friday, is now up 1.2 percent for 2010 so far.

Safe-haven U.S. government debt eked out slim gains, while the dollar fell broadly.

FedEx, regarded as an economic bellwether, said more packages were flowing through both its air and ground networks.

Recent data have implied the U.S. economy's recovery from its longest and deepest recession since the 1930s slowed in recent months, but economists do not expect a renewed downturn.

Ford Motor Co Chief Executive Alan Mulally said he agreed, telling NBC's "Today" show: "I think that we're going to have good, steady growth here."

ACTIVITY SLOWING DOWN

The government is expected to report on Friday that growth in gross domestic product slowed to a 2.5 percent annual rate in the April-June period from a 2.7 percent pace in the first three months of the year.

Moderation in growth was signaled by a measure of national economic activity released on Monday. The Chicago Federal Reserve Bank said its national activity index fell in June for the first time since February, dropping to minus 0.63 from a positive 0.31 in May. A reading above zero indicates the economy is growing above trend.

Separately, a gauge of factory activity in the Texas region extended its decline this month, suggesting a pullback in manufacturing continued in July.