UPDATE 1-Lumber prices fall as home-buyer credit nears end

* Expiring tax credit may slow home sales

* Lumber prices down sharply for second session

* Lumber companies may restart idled mills.

(Adds closing prices)

By Bob Burgdorfer

CHICAGO, April 26 (Reuters) - Lumber prices fell on Monday for the second consecutive session at the Chicago Mercantile Exchange, as analysts and traders said home building should slow after a U.S. home-buyer tax credit expires this week.

Any slowdown in home building would pressure lumber prices since home construction is the largest user of lumber. The lumber market also is concerned that sharp price gains earlier this month could encourage lumber companies to boost production by restarting idled mills.

"The thing in the background is the tax credit is expiring," said Paul Latta, analyst with Seattle-based brokerage McAdams Wright Ragen Inc.

The May lumber contract 2LBK0 closed on Monday at $307.10 per thousand board feet, down $8.40 for the day and down 5.5 percent since Thursday.

New home sales and homebuilding have been rising this year, but Latta said some lumber market investors may think it will be hard to maintain those gains once the tax credit expires.

The federal tax credit plan gives new U.S. home buyers up to $8,000 in credit, while repeat buyers get up to $6,500. To qualify, houses must be under contract by April 30 and the deals closed by the end of June.

U.S. housing starts in March were the highest since November 2008 at an adjusted annual rate of 626,000 units, the U.S. Commerce Department said this month. It said permits issued in March to build new homes were the highest in 17 months.

Also fueling selling in Chicago's lumber market was talk that surging prices could tempt lumber mills to restart idled mills and boost production.

"I think a lot of lumber mills are surprised by these prices," said Brian Leonard, Chicago-based analyst with Rosenthal Collins.

Lumber prices are trading above $300 per thousand board feet, while lumber companies had expected prices to peak at about $280, said Leonard. As a result, some mills have restarted production or will soon, he said.

The closely watched Random Lengths cash lumber report on Friday quoted the average price for cash spruce at $320 per tbf, up $12 from a week earlier. [ID:nUSTIMOO1]

Late on Friday, lumber producer West Fraser Timber Co (WFT.TO) reported a first-quarter profit due to higher lumber prices. But it warned that prices could move lower later in the year as idled production capacity elsewhere in the industry comes back on line. [ID:n23244587]

(Additional reporting by Alan Dowd in Vancouver and Corbett Daly in Washington; Editing by David Gregorio)