By Lucia Mutikani

WASHINGTON (Reuters) - Sales of previously owned U.S. homes jumped last month to their highest level in more than 2-1/2 years, but a fall in an economic gauge was a reminder that recovery from recession would be patchy.

Sales of existing home sales surged a record 10.1 percent month-over-month in October, the National Association of Realtors (NAR) said on Monday, as buyers rushed to take advantage of a popular tax credit for first-time buyers that had been scheduled to end this month.

"Although the data are biased higher from policy measures, we do believe this sharp gain signals pent-up demand and a willingness to purchase homes, which is a good sign for the sustainability of the housing recovery," said Michelle Meyer, an economist at Barclays Capital in New York.

The housing numbers, which easily topped market expectations, helped drive up stocks, but a decline in the Federal Reserve Bank of Chicago's index of national economic activity offered a somewhat more sobering picture.

The White House said on Monday it was reviewing options to spur economic activity and job creation, but stressed any action would be taken in the context of the fiscal challenges facing the country.

Sales of existing home sales surged in October to an annual rate of 6.10 million units, the NAR reported, beating market expectations for a 5.70 million-unit pace and above September's 5.54 million-unit rate. The housing market is slowly mending after a three-year decline, which helped tip the U.S. economy into its worst recession in seven decades.

U.S. stocks snapped a three-day losing streak on the housing data, which eclipsed the report from the Federal Reserve Bank of Chicago showing its National Activity Index, a measure of the economy, slid to -1.08 from -1.01 in September.

The blue chip Dow Jones industrial average index hit a 13-month high before closing up 1.29 percent.

The Chicago Fed's National Activity Index's three-month moving average decreased to -0.91 in October from -0.67 in September, declining for the first time in 2009.

According to the Chicago Fed, a move below -0.70 in the three-month moving average following a period of economic expansion indicates an increasing likelihood a recession has begun.

This development will likely feed into fears the economic recovery that started in the third quarter may lose some momentum once government stimulus wanes, given the high unemployment that is crimping consumer spending.

Analysts are cautiously hoping a sustained housing market recovery will help improve the psychology of households, which has been shaken by an unemployment rate of 10.2 percent, the highest in 26-1/2 years.

EXISTING HOME SALES BOTTOMED