* Existing home sales dive 27.2 percent in July
* Sales fall for third straight month, lowest in 15 years
* Supply of homes rises to 12.5 months, largest since 1999
* Median home price rises 0.7 percent from year earlier (Adds Fed official, background, updates markets)
WASHINGTON, Aug 24 (Reuters) - Sales of previously owned U.S. homes took a record plunge in July to their slowest pace in 15 years, underlining the housing market's struggle to find its footing without government aid.
Tuesday's report from the National Association of Realtors, which was much worse than market expectations, was the latest data that indicated economic activity continued to slacken into the third quarter.
The NAR said overall sales were at their lowest since it started the existing-home sales data series in 1999, with single-family home sales that account for most business at their lowest since 1995. Association chief economist Lawrence Yun characterized overall sales as the softest since 1995.
The dismal sales report came as Chicago Federal Reserve President Charles Evans warned the risk of a double-dip recession was higher than six months ago. He doubted that output will actually shrink but said recovery will be modest.
"It is becoming abundantly clear that the housing market is undermining the already faltering wider economic recovery. With the increasingly inevitable double-dip in prices yet to come, things could yet get a lot worse," said Paul Dales, a U.S. economist at Capital Economics in Toronto.
Existing home sales dropped a record 27.2 percent from June to an annual rate of 3.83 million units. June sales were revised down to a 5.26 million-unit pace from a previously reported 5.37 million.
Financial markets had expected sales to fall only 12 percent to a 4.70 million-unit rate last month. The end of a popular home-buyer tax credit, which had supported sales and home-building activity, continues to haunt the troubled housing market.
Major U.S. stock indexes tumbled more than 1.3 percent as investors dumped riskier assets in favor of safe haven government debt. Prices for U.S. Treasuries rallied, with the yield on the two-year note tumbling to a record low.
The cost of insuring U.S. home-builders' debt rose. The U.S. dollar fell to a 15-year low against the yen and fell versus the euro. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a graphic on U.S. existing home sales, click: link.reuters.com/bam86n ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
TAX CREDIT PARTIALLY TO BLAME
The housing market, which helped to push the economy into its worst recession since the Great Depression, has been mired in weakness following the end of the tax credit in April.
The incentive pulled forward sales and building activity, leaving a huge void that analysts said was also being exacerbated by a 9.5 percent unemployment rate.
The sour economy, especially the stubbornly high unemployment rate, is hurting President Barack Obama's popularity and putting in jeopardy the Democratic Party's control of Congress in November's mid-term elections.
Almost three-quarters of Americans are very concerned about unemployment and more people now disapprove of President Barack Obama than approve of him, according to the latest Reuters/Ipsos poll. [ID:nN24253635]
The government on Friday is expected to revise down growth in second-quarter gross domestic product to an annual pace of 1.4 percent from 2.4 percent, according to a Reuters survey.
Dallas Federal Reserve Bank President Richard Fisher told Fox Business Network the U.S. central bank decided to reinvest proceeds from its mortgage-related assets to avoid unintentionally clamping down on monetary policy when the recovery was showing signs of weakening.
The Fed, which has kept overnight interest rates near zero, has repeatedly said it stood ready to take further steps should the economic picture deteriorate. It announced this month that it would use proceeds from mortgage-related assets to buy longer-term Treasury debt. [ID:nN24268972]
Some analysts said the drop in existing home sales had been exaggerated by the end of the housing tax credit.
"We are seeing a bit of an overcorrection from the end of the tax credit, we will probably see another month or two of this before we start the upward trend," said Eric Fox, vice president for statistical and economic modeling at Veros in Santa Ana, California.
"Later in the fall we will probably be back to a more stable level. But at the same time, unemployment has remained stubbornly high and a lot of people are sitting on the sidelines until they see that there is a sustained recovery before they pull the trigger and buy a home."
With home sales tumbling, the inventory of previously owned homes for sale rose 2.5 percent to 3.98 million units from June, representing a supply of 12.5 months -- the highest since at least 1999 and up from June's 8.9 months.
The jump in the supply of homes was almost double the six to seven months' supply considered that has been historically consistent with stable prices.
Last month foreclosed properties accounted for 22 percent of sales while short sales made up 10 percent. First-time buyers accounted for 38 percent of transactions, the lowest in 12 months.
The national median home price rose 0.7 percent from July last year to $182,600. (Reporting by Lucia Mutikani; Editing by Neil Stempleman)