Toll Brothers Inc reported a smaller quarterly loss and sharply higher orders, saying consumer demand has finally begun to pick up, and the luxury homebuilder's shares rose nearly 4 percent.

While the company benefited from a federal tax credit for homebuyers that expired at the end of April, it said deposits, or nonbinding reservations for homes, had risen even further since the end of the quarter.

Activity has been driven by an increase in confidence among our buyers in their job security, their ability to sell their existing homes, and general trends in home prices, Chief Executive Officer Robert Toll said in a statement.

Toll, a national builder known for large, ornate homes on sprawling suburban lots, said its loss had narrowed to $40.4 million, or 24 cents per share, in the second quarter ended on April 30, from $83.2 million, or 52 cents per share, a year earlier.

Analysts on average were expecting a loss of 23 cents a share, according to Thomson Reuters I/B/E/S.

Revenue fell 22 percent to $311 million, compared with analysts' estimates of $322 million. The company attributed the decline to a low fiscal 2009 backlog.

Net signed contracts, a measure of future revenue, jumped 41 percent to 820 units. That was well above estimates for about 719 units, said Ticonderoga Securities analyst Stephen East.

The company was very positive about trends both pre-and-post quarter end, East said in a note to clients. This should get investors very interested.

Toll, which is especially active in the U.S. Northeast and mid-Atlantic states, reported its first year-over-year increase in backlog in four years. It rose 5 percent to $993.5 million and 10 percent to 1,738 units.

In another sign of stabilization, far fewer people are canceling contracts than a year ago: about 5 percent, down from more than 21 percent in 2009's second quarter.

Toll shares were up 3.7 percent at $21.38 in early trading.

It appears our business has finally emerged from the tunnel and into a bit of daylight, Robert Toll said.

Earlier this month, the company said he would step down as CEO in June, and Douglas Yearley, who has worked there for 20 years, would replace him.

SLOW HOUSING RECOVERY

The U.S. housing market has seen a tentative recovery supported by such government initiatives as the tax credit used primarily by first-time home buyers. But Toll has not made a profit in recent quarters, unlike rivals such as D.R. Horton Inc and Lennar Corp .

Toll said it benefited less directly from the tax credit because most of its clients are trading up, although the credit does help by enabling trade-up buyers to sell their own homes.

Recent data also suggests the housing sector's recovery will be slow. Sales of previously owned U.S. homes touched a five-month high in April, but that was accompanied by a jump in houses on the market. A report on new home sales is due later on Wednesday.

And while home prices rose in March from a year earlier, they slipped in the first quarter from the previous three months as federal aid fades away.

I would have thought we'd have a more vigorous rebound, said Kenneth Simonson, chief economist of Associated General Contractors of America.

He had expected a bigger surge in home sales as consumers' financial health improves and mortgage rates and home prices remain low.

I still remain optimistic, although more cautiously so, about the prospects for home building over the rest of the year, he said.

One million new U.S. households are still being added yearly, supporting long-term demand for new homes, he added.

(Reporting by Shrutika Verma in Bangalore and Nick Zieminski in New York; Editing by Lisa Von Ahn and Derek Caney)