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WRAPUP 1-US new home sales soar, factory activity edges up

* New home sales increase 5.7 percent in September

* New home sales touch highest rate since April 2010

* Median new home price jumps 11.7 percent from year ago

* Markit flash PMI rises to 51.3 in October

WASHINGTON, Oct 24 (Reuters) - New U.S. single-family home sales surged in September to their highest level in nearly 2-1/2 years, further evidence the housing market recovery is gaining steam.

Optimism over the economy was tempered somewhat as other data on Wednesday showed only a modest pick-up in factory activity this month amid a darkening cloud of economic uncertainty at home and slower growth abroad.

The Commerce Department said new home sales increased 5.7 percent to a seasonally adjusted 389,000-unit annual rate - the highest since April 2010, when sales were boosted by a tax credit for first-time homebuyers.

Though August's sales pace was revised down to a 368,000-unit pace from the previously reported 373,000 units, the tenor of the report was relatively strong, with the median price of a new home rising 11.7 percent from a year ago.

Economists polled by Reuters had forecast sales rising to a 385,000-unit rate last month.

The housing market is on the mend after collapsing in 2006 and dragging the economy through its worst recession since the Great Depression. Home sales are increasing, pushing down the stock of unsold properties, giving a modest lift to house prices and builders' confidence to take on new projects.

A separate gauge of homes prices released by the Federal Housing Finance Agency late on Tuesday showed a gain of 0.7 percent in August and 4.7 percent over the past year.

However, the housing market recovery lacks the muscle to take the baton from manufacturing as the main driver of the economic recovery.

``Although housing activity is improving, economic growth is going to remain subdued around the vicinity of two percent or so because other drivers of economic activity - consumer spending and business investment as well as exports - are still growing at a fairly restrained pace,'' said Tanweer Akram, senior economist at ING Management in Atlanta.

On Friday, the government will report its first estimate of third-quarter growth. Economists polled by Reuters expect the economy to have expanded at a 1.9 percent annual rate after growing 1.3 percent the prior quarter.

MANUFACTURING SLUGGISH

In separate report, financial information firm Markit said its U.S. ``flash,'' or preliminary, Purchasing Managers Index for the manufacturing sector edged up to 51.3 this month from 51.1 in September. A reading above 50 indicates expansion.

A modest rise in output helped boost business conditions in the sector, which suffered its weakest quarter in three years during the July-to-September period.

But fewer orders from domestic clients and a fifth straight monthly decline in overseas demand for U.S. goods indicates manufacturing was acting as a drag on growth and employment, said Markit chief economist Chris Williamson.

``Purchasing managers report that the key to the ongoing weakness remains uncertainty among customers in export markets, notably Europe and Asia,'' he said.

Factory activity has slowed in recent months, also as uncertainty over U.S. fiscal policy causes businesses to scale back on production and capital expenditure programs.

There are fears that the U.S. Congress might fail to avoid the automatic tax hikes and government spending cuts that will suck about $600 billion out of the economy next year.

The housing recovery is being supported by record-low mortgage rates, which have been held down by the Federal Reserve's ultra-accommodative monetary policy stance.

The U.S. central bank has targeted housing as a channel to boost growth, announcing last month that it would buy $40 billion in mortgage-backed securities per month until the outlook for employment improved significantly.

The Fed's monetary policy setting committee met for a second day on Wednesday, but is not expected to announce any changes to policy when it concludes its meeting this afternoon.

Though the inventory of new homes on the market rose 1.4 percent in September, it remained near record lows.

At September's sales pace it would take 4.5 months to clear the houses on the market, the lowest since October 2005, down from 4.7 months in August.

Sales last month were up in three of the four regions. They tumbled 37.3 percent in the Midwest.