WRAPUP 3-US consumer, labor data buoy optimism on recovery

* Consumer spending rises faster than expected in October

* Applications for jobless aid lowest in more than a year

* Orders for long-lasting goods unexpectedly fall

* New home sales highest in a year, inventory plunges (Recasts, updates markets, adds byline)

By Lucia Mutikani

WASHINGTON, Nov 25 (Reuters) - U.S. consumer spending and home sales rose more than expected in October, while new claims for jobless benefits fell sharply last week, suggesting the economic recovery was gaining traction.

A surprise decline in orders for long-lasting U.S.-made goods and a second straight monthly drop in consumer confidence, however, offered a reminder that the recovery from the most brutal recession in 70 years would be gradual.

"Overall, the data suggest we have relatively strong growth momentum, at least for now. The big question is about next year, when the effects of government stimulus fade. What is the economy going to look like?" said Zach Pandl, an economist at Nomura Securities International in New York.

The economy resumed growth in the third quarter, helped by government programs such as a popular $8,000 tax credit for first-time home buyers, which continues to prop up sales.

The Commerce Department on Wednesday said consumer spending, which normally accounts for over two-thirds of U.S. economic activity, increased 0.7 percent last month after falling 0.6 percent in September. Economists had expected a gain of 0.5 percent.

Separately, the Labor Department reported that initial claims for state unemployment benefits slid to 466,000 last week, the lowest in more than a year, from 501,000 the prior week. It was the fourth straight weekly decline.

Another Commerce Department report showed sales of newly built U.S. single-family homes surged 6.2 percent to a one-year high last month. Sales hit a 430,000 unit annual pace, up from 405,000 in September and beating expectations for a 410,000 unit pace.

The data lifted U.S. stocks, while prices of U.S. government debt, a traditional safe-haven investment, fell.

NEW HOMES INVENTORY PLUMMETS

The rise in sales pushed the supply of new homes on the market down to 239,000 units, the lowest level since May 1971.

Home sales have been driven higher by buyers rushing to take advantage of the tax credit for first-time homeowners, which had been scheduled to expire on Nov. 30 but has since been extended into next year.

Falling house prices and low mortgage rates are also contributing to the recovery in the housing market, whose collapse was the main trigger of the U.S. recession.

U.S. 30-year mortgage rates dropped in the past week to match a record low set in April, while the 15-year home loan rate fell to a new all-time low, Freddie Mac reported on Wednesday.

Data earlier this week showed sales of previously owned homes jumped to their highest level in more than 2-1/2 years last month, and the decline in prices moderated.

Economists are hoping signs of stability in the housing market will help to improve the psychology of households, shattered by the highest unemployment in 26-1/2 years, but confidence remained shaky this month.

The Reuters/University of Michigan Surveys of Consumers' final index of consumer sentiment in November came in at 67.4, down from October's 70.6 but up from an initial 66.0

And a 0.6 percent drop last month in orders for durable goods, which include products such as refrigerators and computers meant to last at least three years, raised fears that the manufacturing sector's recovery was faltering.

Orders increased 2 percent in September.

"While we are convinced that the industrial recession has ended, the chance of a vigorous recovery is remote. The industrial recovery will likely be relatively slow and punctuated by fits of growth and decline," said Daniel Meckstroth, chief economist for the Manufacturers Alliance/MAPI.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, fell 2.9 percent last month after rising by a hefty 2.6 percent in September. (Additional reporting by Mark Felsenthal in Washington and Richard Leong in New York; Editing by Leslie Adler) ((lucia.mutikani@thomsonreuters.com; Tel: 202 898 8315; Reuters messaging: lucia.mutikani.reuters.com@reuters.net)) ((Multimedia versions of Reuters Top News are now available for: * 3000 Xtra: visit http://topnews.session.rservices.com

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