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A contract pending sign is shown in Richland Hills, Texas, in this file photo.

Donna McWilliam/The Associated Press

Contracts to purchase previously owned U.S. homes unexpectedly fell in April to a four-month low, undermining some of the recent optimism that the housing sector was touching bottom.

The National Association of Realtors said on Wednesday its Pending Home Sales Index, based on contracts signed last month, fell 5.5 per cent to 95.5, its lowest level since December, after a downwardly revised 3.8 per cent increase in March.

Still, the series remained sharply higher from a year earlier, and economists said the data did not change the view that the U.S. economy remains in recovery mode.

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"The drop in pending home sales is clearly disappointing," said Pierre Ellis, an economist at Decision Economics in New York. "It remains to be seen whether this is the beginning of a real downturn."

U.S. stock prices tumbled as rising bond yields for Italy and Spain and the latest poll results in Greece worsened fears the euro zone's debt crisis could tank the U.S. economy. The yield on 10-year U.S. Treasury notes sank to the lowest in 60 years.

Economists polled by Reuters had expected signed contracts, which lead home sales by a month or two, to rise 0.1 per cent after a previously reported 4.1-per-cent gain in March.

The housing market has been one of the U.S. economy's weakest links as it recovers from the recession, but many economists think the sector will actually add to economic growth in 2012 for the first time in seven years.

The report on pending contracts in April could temper some of that optimism.

Millions of Americans owe more on their homes than they are worth, making them more cautious about spending and holding back the economic recovery.

After a debt-fueled housing bubble, prices have fallen about a third since 2006, according to some measures, and the housing market continues to be saddled with an oversupply of unsold properties.

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There have been some signs that the deflation in prices could be over. On Tuesday, the S&P/Case Shiller composite index showed home prices rose for the second month in a row in March.

Other recent signals have also been upbeat. Groundbreaking for new homes rebounded in April and sales of both new and previously owned homes rose.

But Wednesday's report showed contracts fell 12 per cent in the western United States and 6.8 per cent in the South. They edged lower in the Midwest and rose slightly in the Northeast.

Also casting a shadow, applications for U.S. home mortgages fell last week as refinance demand faltered, even as mortgage rates hit another record low. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, decreased 1.3 per cent in the week ended May 25.

The National Association of Realtors downplayed the declines in pending sales.

"All of the major housing market indicators are expected to trend gradually up," said Lawrence Yun, chief NAR economist.

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