By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumer spending and
incomes were flat in June while home purchase contracts tumbled
to a record low, implying an anemic economic recovery for the
remainder of this year.

The reports on Tuesday showed the recovery assumed a
decisively sluggish tone in the last month of the second
quarter, setting up the July-September period for a lackluster
performance just as lawmakers hit the hustings before November
elections.

Analysts said there was now a greater risk that the
April-June quarter's already soft 2.4 percent growth pace could
be revised down when the government publishes its second
estimate for gross domestic product later this month.

"The data confirm the growth momentum doesn't look good,"
said Bill Cheney, chief economist at John Hancock Financial
Services in Boston. "We originally expected the second quarter
to be quite strong and then estimates kept coming down and now
it looks like it will probably be revised even further down."

Spending had edged up 0.1 percent in May, the Commerce
Department said, and analysts expected another rise in June.

A separate report from the National Association of Realtors
showed the group's Pending Home Sales Index, based on contracts
to buy previously owned homes signed in June, dropped 2.6
percent to a historic low of 75.7. Markets had expected the
index to rise 0.6 percent.

The weak data and below forecast earnings from household
products maker Procter & Gamble Co and Dow Chemical
weighed on U.S. stocks, with major indices trading down
in the afternoon. The spending report also hit retailers'
stocks, with the Standard & Poor's retailing index
sliding 1.8 percent.

Prices for safe-haven U.S. government bonds pushed higher,
with the yield on the two-year Treasury note dropping to an
all-time low. Bond yields move inversely to prices. The U.S.
dollar tumbled to multimonth lows against the euro, yen and
sterling.

ECONOMY IN A FUNK

Federal Reserve Chairman Ben Bernanke said on Monday that
consumer spending should pick up in coming quarters as income
rises and credit conditions improve, helping to sustain the
recovery.

But the sluggish pace of economic growth threatens to keep
unemployment high for months, posing trouble for Democrats
hoping to retain their congressional majorities and potentially
undercutting the income growth Bernanke is hoping to see.

Treasury Secretary Timothy Geithner on Tuesday warned that
the unemployment rate, which stood at a lofty 9.5 percent in
June, could rise for a couple of months before subsiding.

"But what we expect to see ... is an economy that's
gradually healing," he said on ABC television.

The government is expected to report on Friday that
non-farm payrolls fell by 65,000 in July after declining by
125,000 in June as temporary workers hired to conduct the
decennial census are let go. Private-sector payrolls are seen
rising a modest 90,000 and the unemployment rate is expected to
climb to 9.6 percent.

At its meeting on Tuesday, the Fed's policy-setting
committee will debate whether further steps are needed to
bolster the economy

NO HOUSING SALVATION

The decline in contracts to buy existing homes suggested
sales will probably fall again in July as the market tries to
adjust to the end of a popular homebuyer tax credit.

"High unemployment, low confidence and tight credit will
mean that the bounce back (in home sales) will be fairly
modest. In other words, the housing market will not be able to
pull the wider economy out of its current funk," said Paul
Dales, U.S economist at Capital Economics in Toronto.

The Commerce Department also reported that new orders
received by U.S. factories dropped 1.2 percent in June, a
steeper drop than markets expected.

Manufacturing has been leading the economy's recovery, but
the sector has displayed signs of exhaustion. Data on Monday
showed factory activity slowed in July for a third straight
month amid a pullback in orders.

The weak factory orders report supported views the
government would lower its initial second quarter GDP
estimate.

"Second quarter growth is now looking especially soft. On
the brighter side, the prospect of a big inventory overhang
weighing on third-quarter production -- which loomed large in
the initial estimate -- now appears less threatening," said
Michael Feroli, an economist at JPMorgan in New York.

In June, consumer spending adjusted for inflation rose 0.1
percent after gaining 0.2 percent in May.

Personal income was flat after increasing 0.3 percent in
May. It was the first time since September that incomes had not
risen.

Real disposable income increased 0.2 percent after rising
0.4 percent the prior month. The saving rate was 6.4 percent,
the highest since June last year.

The report also showed the personal consumption
expenditures price index, excluding food and energy -- a key
inflation measure monitored by the Fed -- rose 1.4 percent in
the 12 months to June, the slowest increase since September.

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(Reporting by Lucia Mutikani; Additional reporting by Tabassum
Zakaria and Corbett Daly; Editing by Kenneth Barry)