Existing home sales unexpectedly dropped in July as cancellations of pending contracts continued to depress buying activity.

The National Association of Realtors said on Thursday sales fell 3.5 percent month over month to an annual rate of 4.67 million units. June's sales were upwardly revised at a 4.84 million-unit rate.

Economists polled by Reuters had expected sales to rise 3.8 percent to a 4.90 million-unit pace. Compared to July 2010, sales were 21 percent higher.

Major stock benchmark indexes fell more than 4 percent on a morning of downbeat economic data that also included mid-Atlantic factory activity. Investors snapped up U.S. Treasuries on fears over a global economic slowdown.

The home sales number is beginning to creep downward, said Pierre Ellis, a senior economist at Decisions Economics in New York. It gives the appearance of melting away, contributing to consumer sector worries.

And that was even before the recent financial market volatility, he added.

NAR Chief economist Lawrence Yun said the fallout rate of contract sales for properties on the market continued to average 16 percent for a second straight month, higher than the 10 percent average seen during the same period in 2010. The uptick was a result of difficulties with mortgage financing and home appraisals, he said.

The buyers lacked the confidence, Yun said. They can always find a reason to back out of a contract..

( Reporting by Margaret Chadbourn, Editing by W Simon ))