* Existing home sales hit 3-1/2-year high in May * Philadelphia Fed business index rebounds in June * Weekly jobless claims increase 18,000 * Data covers survey week for June nonfarm payrolls By Lucia Mutikani WASHINGTON, June 20 (Reuters) - U.S. home resales hit a 3-1/2-year high in May and factory activity in the Mid-Atlantic region rebounded this month, backing the Federal Reserve's view that risks to the economy have diminished. While other data on Thursday showed more Americans than expected filed new claims for unemployment benefits last week, the increase was not big enough to signal a material shift from the recent pace of moderate job growth. Higher taxes and deep government spending cuts that took effect this year had raised fears that the economy could slow abruptly, but the recovery appears to moving to firmer ground. "The drag from tighter fiscal policy is starting to dissipate. We have passed the worst of the fiscal-induced slowdown," said Millan Mulraine, a senior economist at TD Securities in New York. The data came a day after the Fed painted a fairly upbeat picture of the economy and said it expected to slow the pace of its bond-buying stimulus later this year, bringing it to a halt around the middle of 2014. The central bank is buying $85 billion in bonds per month in an effort to keep interest rates low and drive down still-high unemployment. Existing home sales jumped 4.2 percent to an annual rate of 5.18 million units, the highest level since November 2009, the National Association of Realtors said. At the same time, the median home price surged 15.4 percent from a year ago to $208,000. It was the biggest year-over-year increase since 2005 and left prices at their highest level since July 2008. Analysts said the economy's resilience in the face of Washington's belt-tightening largely reflects the spillover effect from surging home prices, which are supporting household net worth and buoying consumer confidence. "The positive feedback loop from the strengthening housing market is starting to happen. The economy would not be as strong as it is without housing," said Sung Won Sohn, an economics professor at California State University Channel Islands. MIXED FACTORY DATA In a separate report, the Philadelphia Federal Reserve Bank said its business activity index rebounded to 12.5 this month from minus 5.2 in May, marking the highest reading in two years. A reading above zero indicates an expansion of manufacturing in the mid-Atlantic region, which covers eastern Pennsylvania, southern New Jersey and Delaware. The gain, which reflected a surge in new orders to a two-year high and an improvement in factory employment conditions, followed a similar bounce back in manufacturing activity in New York state. Although a report from financial data firm Markit showed a slower pace of national factory activity in June, economists said the regional data suggested a survey from the Institute for Supply Management due early next month would likely show activity clawed back into expansion territory. "In the second half of the year, we will see a more meaningful improvement in the overall growth momentum," said Mulraine. In a third report, the Labor Department said initial claims for state unemployment benefits rose 18,000 last week to a seasonally adjusted 354,000. A four-week moving average, which irons out weekly volatility, rose 2,500 to 348,250 - a level economists usually associate with steady job gains. "Where jobless claims are right now should tell you that the economy is doing okay, that it's on a decent path," said Brett Ryan, an economist at Deutsche Bank Securities in New York. The data added further fuel to a U.S. dollar rally touched off by the Fed on Wednesday, with the greenback reaching a two-week high against a basket of currencies. Prices for stocks and bonds, which were hit hard on Wednesday, continued to fall. The yield on the benchmark 10-year U.S. Treasury debt note rose to a near two-year high. Last week's jobless claims data covered the period in which the government surveyed companies for June's nonfarm payrolls count. Claims increased 10,000 between the May and June survey periods, suggesting little change in the pace of job creation. Employers added 175,000 new jobs to their payrolls last month, with the unemployment rate ticking up a tenth of a percentage point to 7.6 percent. Job gains have averaged 172,000 per month over the last 12 months.