* Pending home sales rise 4.3 percent in August
* Pending homes sales index at four-month high
* Factory orders drop, but up excluding transportation (Adds Bernanke comments, updates markets to close)
WASHINGTON, Oct 4 (Reuters) - Pending sales of previously owned U.S. homes hit a four-month high in August, a sign the housing market was stabilizing at very low levels following its sharp drop after a home-buyer tax credit expired.
Another report on Monday showed new orders received by U.S. factories fell 0.5 percent in August, although they were up 0.9 percent excluding volatile transportation bookings.
"We don't think things are going to get any worse, but they are not going to get better very quickly," said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts.
The data offered few fresh clues on whether the Federal Reserve would embark on a new round of monetary policy easing. Financial markets are bracing for the Fed to kick off another round of bond buying as early as next month.
The U.S. central bank's decision will hinge on inflation and labor market developments, and a government report on employment on Friday could play a big role.
The National Association of Realtors said its Pending Home Sales Index, based on contracts signed in August, increased 4.3 percent from July. Markets had expected the index, which leads existing home sales by a month or two, to rise 3 percent. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Take a Look on housing market [ID:nN19590716] Graphic on pending home sales: link.reuters.com/zyg76p ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
The data had little impact in U.S. stocks, which ended down in light trading as a ratings downgrade weighed on Microsoft Corp (MSFT.O) and new Swiss banking rules raised fears of smaller bank profits. Prices for U.S. government debt rose, while the dollar pushed off a 6-1/2-month low versus the euro.
Home sales and building activity are stabilizing after a downward spiral following the end in April of a popular tax credit for home buyers. The rise in pending home contracts suggested a modest gain in September existing home sales.
However, high unemployment and a glut of homes on the market indicate recovery will be very weak.
"The fact that mortgage applications for home purchase have remained close to a fourteen-year low suggests that the recovery will be both weak and slow," said Paul Dales, a U.S. economist at Capital Economics in Toronto.
"Households are simply unable to, or do not want to, buy a home. The problem is not the level of borrowing costs, meaning that more quantitative easing by the Fed is unlikely to make much difference. The upshot is that housing activity will remain weak for a number of years yet."
The central bank last month said it was ready to inject more money into the economy if needed to shore up a sluggish recovery from the worst downturn since the 1930s and prevent a damaging bout of deflation.
On Monday, Fed Chairman Ben Bernanke told university students that the first round of asset purchases, which ended in March this year, had helped to lower interest rates and support the economy.
"I don't have a number to give you, but I do think that the additional purchases, although we don't have precise numbers, have the ability to ease financial conditions," Bernanke said.
The Fed, which has already injected $1.7 trillion into the economy by purchasing mortgage-related and government bonds, next meets on Nov. 2-3.
Although housing was the main trigger of the recession, economists said it was not critical for the broader economic recovery and they did not expect it to weigh heavily on the U.S. central bank's policy decision.
"I don't think the Fed is going to be looking at the housing market all that much. They understand that the housing market will get better when the labor market improves," said IHS Global Insight's Newport.
The government's report on jobs is expected to show overall nonfarm employment holding steady in September after declining by 54,000 the prior month, according to a Reuters survey. However, private payrolls probably rose 75,000 after increasing 67,000 in August.
While that would mark an improvement, it would still be well shy of the roughly 125,000 jobs a month or so that economists say are needed to keep up with growth in the labor force and keep the unemployment rate from rising.
Although businesses have been lukewarm to hiring, they are stepping up spending on capital goods. A key measure of business spending in the factory orders report rose 5.1 percent in August, almost reversing a 5.3 percent decline in July.
Orders for machinery rose 5.2 percent, while orders for computers and electronic products gained 3.7 percent. (Additional reporting by David Lawder; Editing by Chizu Nomiyama)