By Lucia Mutikani

WASHINGTON (Reuters) - Pending sales of previously owned U.S. homes fell more sharply than expected in November, but a surge in new factory orders offered assurance the economic recovery remained on track.

In a further boost to the economy, initial results from automakers on Tuesday showed December's vehicle sales on track to be the strongest since the summer's "cash for clunkers" trade-in incentive program.

"It goes along with what we've been seeing, a slight improvement in the economy overall and it's gaining some breadth ... particularly on the manufacturing level," said Bruce Bittles, chief investment strategist at Robert W. Baird & Co. in Nashville.

The National Association of Realtors' Pending Home Sales Index, based on contracts signed in November, dropped 16 percent from October to 96.0 after rising for nine straight months.

Analysts, who had looked for a decline of only 2 percent, blamed the drop on the end of a rush to beat the original expiration of a popular tax credit. They said the fact the index was up 15.5 percent from its year-ago level indicated the housing market continued to heal.

A separate report from the Commerce Department showed new orders at U.S. factories rose 1.1 percent in November. It was their third straight monthly increase and financial markets had expected a 0.5 percent gain.

The data came a day after a report showed factory activity in December rose to its highest level since April 2006.

The slump in pending home sales, which lead actual sales by a month or two, rekindled concerns the housing market could falter once government support is withdrawn.

The bullish factory orders data partially offset the weak housing report, hoisting the benchmark Standard & Poor's 500 Index <.SPX> to a 15-month closing high. Prices for U.S. government debt rose for a second day, while the U.S. dollar suffered its biggest one-day fall against the yen in a month.

TAX CREDIT CAUSES VOLATILITY

Home sales have been boosted by an $8,000 tax credit for first-time home buyers. The popular tax credit, which was originally scheduled to expire at the end of November, has been expanded and extended to mid-2010.

For a graphic detailing pending home sales, see http://link.reuters.com/sez79g

The tax credit has caused volatility in November data and sent conflicting signals on the housing sector's recovery from a collapse that sent the economy reeling into its worst recession since the 1930s.