U.S. home resales rose to a 1-1/2 year high in January, pushing the supply of properties on the market to the lowest level in almost seven years in a hopeful sign for the housing sector.

The National Association of Realtors said on Wednesday existing home sales increased 4.3 percent to an annual rate of 4.57 million units last month, the fastest pace since May 2010.

It was the latest sign the housing market may be coming off the floor. While economists attributed some of the rise to unseasonably warm winter weather, they also said it signalled genuine improvement.

Sales were up across all four regions of the country, with the West recording the biggest gain -- an 8.8 percent increase.

At least some of the improvement in the last few months could have reflected milder winter weather, but for the most part, it seems that the housing sector may have turned the corner, said Guy Berger, an economist at RBS in Stamford, Connecticut.

The tenor of the report was weakened somewhat by a sharp downward revision to December's sales data to show only a 4.38 million unit sales rate rather than the previously reported 4.61 million unit pace.

A brightening economic outlook, marked by a strengthening labour market and buoyant factories, is giving the housing market some lift. Confidence among homebuilders is near five-year highs and they are breaking more ground on new housing projects.

Residential construction is expected to contribute to growth this year for the first time since 2005.

Robert Toll, executive chairman of luxury homebuilder Toll Brothers, welcomed that progress even as his company announced a surprise quarterly loss on Wednesday.

Since the new home industry is coming off several years of historic low levels of production, we are encouraged by the recent improvement, he said in a statement.

The data did little to lift sentiment in U.S. stock markets, which were down in early afternoon as investors fretted about a likely euro zone recession. Prices for U.S. government debt rose on concerns Greece might not be able to avert a messy default even with a fresh bailout.

INVENTORY DWINDLING

The U.S. housing market had been held back by an overhang of unsold homes, but steady sales gains are helping to whittle down supply.

The inventory of unsold homes on the market fell 0.4 percent to 2.31 million last month, the lowest since March 2005. That represented a 6.1 months' supply at January's sales pace, the lowest since April 2006 and down from 6.4 months in December.

However, inventories tend to fall in winter and the decline last month could also be reflecting delays in the process of bringing foreclosed properties to the market.

A supply of six months generally is considered ideal.

We think the foreclosure process will accelerate, which will speed up the flow of distressed inventory. We expect supply to edge back to eight months this year, said Michelle Meyer, a senior economist at Bank of America Merrill Lynch in New York.

That would increase the downward pressure on prices. The median home sales price fell 2 percent to $154,700 in January from a year ago.

Other data on Wednesday showed demand for home purchase loans fell last week, despite mortgage rates holding near historic lows.

The Federal Reserve, which has suggested a number of ways other policymakers could step in to help the beaten-up market, is considering purchasing more mortgage-backed securities to drive mortgages rates even lower.

But some economists are sceptical that would do much good.

I don't think the problem in the mortgage market is high interest rates or availability of liquidity. The problem is lack of jobs and very strict lending standards, said Sung Won Sohn, an economics professor at California State University Channel Islands.

Distressed properties, foreclosures and short sales, which typically occur at deep discounts, accounted for 35 percent of overall sales last month, up from 32 percent in December.

A third of pending existing home sales contracts were cancelled, the NAR said.

(Editing by Andrea Ricci)