U.S. home builder sentiment in July jumped to its highest level since September as improved sales conditions boosted confidence in the market for new single-family homes, an industry group said on Thursday.

The National Association of Home Builders said its preliminary NAHB/Wells Fargo Housing Market Index was 17 in July, up from 15 in June.

Readings below 50 in the index, which was launched in January 1985, indicate more builders view market conditions as poor rather than favorable. The July index was above expectations of 16, based on a Reuters survey of economists.

In an encouraging sign, the improvement was driven by a 3 point gain in the index of present conditions to 17, implying a pickup in new home sales, said Michelle Meyer, an economist at Barclays Capital in New York.

The fact that the gain was driven by current conditions is a positive sign, suggesting home buyer interest increased despite the rise in mortgage rates over June, she said.

The rise in home builder sentiment is a positive for the U.S. housing market, which has been showing some signs of stabilization, with sales rising and home price declines moderating in many regions of the country.

Builders are seeing slightly better sales conditions this month as consumers take advantage of the first-time buyer tax credit, low interest rates and attractive home prices, NAHB Chairman Joe Robson, a home builder from Tulsa, Oklahoma, said in a statement.

The government's $8,000 tax credit for first-time home buyers, part of the economic stimulus package, is helping boost sales.

But there is concern about what lies ahead, Robson added.

A true recovery in the housing market and overall economy cannot take place until the continuing foreclosure crisis is abated and a decent flow of credit is restored to housing production, Robson said.

Meanwhile, the stalled jobs market is a major concern to builders and potential home buyers alike, he said.

The gauge of current single-family homes sales rose to 17 from 14. The index of sales expected in the next six months, however, was unchanged at 26. But the measure of prospective-buyer traffic climbed, rising to 14 from 13, the group said.

The U.S. housing market is suffering the worst downturn since the Great Depression as a huge supply of unsold homes, tighter lending standards and record foreclosures push down home prices.

HOME BUILDERS ARE HURTING U.S. home builders, struggling under sinking demand and a credit crisis, have faced a flood of homes in foreclosure.

But, interest rates on mortgages have fallen in recent weeks, a key development that could help turn the hard-hit housing sector around.

Home builders have curbed their new construction. They have also been reducing their inventories of unsold homes by slashing prices at the expense of profits to pay off debt and keep afloat.

Although today's HMI is positive news that helps confirm the market is bouncing around a bottom, the gain was entirely contained in the component gauging current sales conditions, while the component gauging sales expectations for the next six months remained virtually flat for a fourth consecutive month, NAHB Chief Economist David Crowe said in a statement.

Builders recognize the recovery is going to be a slow one and that we are facing a number of substantial negative forces, he said.

On a regional basis, the housing market index declined in only one of the four regions in July. The Midwest was unchanged at 14 and the South posted a five-point increase to 20. The Northeast posted a three-point decrease to 16. The West was unchanged at 15 this month.

(Reuters Messaging: julie.haviv.reuters.com@reuters.net; e-mail: julie.haviv@thomsonreuters.com; +1-646-223-6153))