* Pending home sales rise 1.7 percent, scale 2-1/2 year high
* Midwest factory gauge advances in December, orders up
* Reports suggest underlying momentum in the economy
By Lucia Mutikani
WASHINGTON, Dec 28 (Reuters) - Contracts for U.S. home resales hit a 2-1/2-year high in November and factory activity in the Midwest expanded this month, suggesting some strength in the economy despite the threat of tighter fiscal policy.
The National Association of Realtors said on Friday its Pending Home Sales Index, based on contracts signed last month, increased 1.7 percent to 106.4 - the highest level since April 2010 when the home-buyer tax credit expired.
November marked the third straight month of gains for signed contracts, which become sales after a month or two, and followed a 5 percent increase in October.
A separate report showed the Institute for Supply Management-Chicago business barometer rose to 51.6 in December from 50.4 in November. A reading above 50 indicates expansion in the regional economy. It was the second straight month of growth and was driven by a rebound in new orders.
The data suggested some of the growth momentum from the third quarter carried into the final three months of 2012, even as businesses and households braced for sharp cuts in government spending and higher taxes in the new year.
Data so far in the fourth quarter ranging from consumer spending, housing, employment and the various manufacturing indicators have been fairly upbeat.
"We don't see much evidence that the economy was slowing as we headed into the end of the year, but everything could change on Jan. 1," said John Ryding, chief economist at RDQ Economics in New York.
There are fears that currently stalled budget talks in Washington will fail to steer clear of a $600 billion "fiscal cliff" of less government spending and higher taxes, which could tip the economy back into recession.
"There is nothing here to suggest that the economy has enough momentum to withstand the shock if we go over the fiscal-cliff with no quick return," said Ryding. "The good news right now is it looks like we could have the mid-twos kind of GDP (growth) for the fourth quarter."
The economy grew at a 3.1 percent annual rate in the third quarter. The latest Reuters survey of economists put fourth-quarter gross domestic product growth at a 1.2 percent rate, mostly because of superstorm Sandy, which struck the East Coast in late October and fiscal cliff-related cutbacks in business spending.
U.S. financial markets ignored the data as attention remained focused on the developments in Washington surrounding the fiscal cliff.
Stocks on Wall Street fell, putting the Standard & Poor's 500 index on track for a fifth straight day of declines. U.S. Treasury debt prices rose, while the dollar was little changed against a basket of currencies.
Though the employment gauge in the Chicago ISM survey fell to a three-year low in December, economists expected a rebound given the strength in new orders.
"The drop in employment reflects the weakness in new orders in November and to a lesser degree the fiscal cliff. With the bounce back in new orders, employment will also bounce back," said Eric Green, chief economist at TD Securities in New York.
The pending home sales report pointed to a strengthening in the housing market recovery. Contracts were up 9.8 percent in the 12 months through November.
The housing market has turned the corner after a dramatic collapse, which dragged the economy through its worst recession since the Great Depression of the 1930s.
Home sales and prices are rising, encouraging builders to undertake new construction projects. Home resale contracts were up in three of the country's four regions. They were unchanged in the South.
"The housing revival seems to be happening in a way that puts some positive feedback loop, a virtuous cycle into the economy," said Jerry Webman, chief economist at OppenheimerFunds in New York.