width=337Sales of new homes dropped a record 32.7 percent in May to the lowest level in at least four decades as the boost from a popular tax credit faded, adding to worries of a slowing economic recovery.

The Commerce Department said on Wednesday single-family home sales tumbled to a 300,000 unit annual rate, the lowest level since the series started in 1963.

In addition, April and March sales figure was revised down to 446,000 units and 389,000 units respectively. The drop in sales in May unwound two months of gains, which had been inspired by a government tax credit for home buyers.

Prospective home owners had to sign contracts by April 30 to qualify for the tax credit. Analysts polled by Reuters had forecast new home sales sliding to a 410,000 unit-pace. New home sales are measured at contract signing.

The previous two months were revised down, so the lift from the tax credit was less than we previously realized. We are getting a little nervous, said David Sloan, an economist at 4Cast in New York.

U.S. stocks fell after new home sales data, and the major indexes turned negative. In addition, the S&P home builders ETF fell 1.6 percent. U.S. government debt prices added to gains.

The report was the latest in a series to suggest that the economy's recovery from the worst downturn since the 1930s might be losing strength.

It also came as Federal Reserve policymakers gathered for a two-day meeting at which they were expected to extend their pledge to hold overnight interest rates ultra low for an extended period to aid the still fragile economic recovery.

The U.S. central bank is not seen lifting rates, currently near zero, until next year.

A report on Tuesday showed sales of previously owned homes, which are recorded at contract closing, fell unexpectedly in May.

The expiry of the tax incentive has also resulted in a decline in new home construction and demand for home loans applications for loans to buy homes fell last week, staying near 13-year lows.

Last month's weak sales pace saw the supply of homes available for sale jumping a record 46.6 percent to 8.5 months' worth, the highest in nearly a year, from 5.8 months' worth in April. However, the number of new homes on the market dipped 0.5 percent to 213,000 units, the lowest since November 1970.

The median sale price for a new home fell 1 percent in May from April to $200,900. In the 12 months to May, prices fell 9.6 percent, the largest decline since July 2009.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)