WASHINGTON (REUTERS) - US home resales rebounded strongly in September and new applications for unemployment benefits hovered around 42-year lows last week, pointing at solid domestic fundamentals even as the global economy falters.

Thursday's upbeat housing and labour market reports could keep the door open to an interest rate hike from the Federal Reserve by the end of the year.

"The market has been a little bit quick to price out a December Fed rate hike. What you are seeing in the data is that the domestic picture looks strong and I think that's what the Fed is going to be looking at closely," said Thomas Costerg, a US economist at Standard Chartered Bank in New York.

The National Association of Realtors said existing home sales increased 4.7 per cent to an annual rate of 5.55 million units last month, almost erasing August's decline.

A firming housing market is boosting household wealth, driving a robust pace of consumer spending.

In turn, strong domestic demand is helping to cushion the blow on the economy from softening global growth, a strong dollar and weak capital spending in the energy sector.

Growth has also been squeezed by efforts by businesses to reduce an inventory bulge, leaving gross domestic product growth estimates for the third quarter running below a 1.5 per cent annualised rate.

The economy grew at a 3.9 per cent rate in the second quarter.

Housing, however, remains constrained by a dearth of properties available for sale. But rising house prices could encourage homeowners to put their houses on the market.

The median price for a previously owned home rose 6.1 per cent in September from a year ago. Realtors and economists say insufficient equity has contributed to the tight housing inventories.

The stock of houses on the market fell 2.6 per cent in September from August. At September's sales pace, it would take 4.8 months to clear houses from the market, down from 5.1 months in August. A six-month supply is viewed as a healthy balance between supply and demand.

The housing index fell 0.43 per cent, underperforming a broadly firmer stock market.

Shares in DR Horton, the largest US homebuilder, declined 1.59 per cent. Lennar Corp slipped 0.9 per cent.

The dollar rallied against the euro on the data and dovish comments from the European Central Bank. Prices for longer-dated US government bonds fell.

FIRMING JOBS MARKET

In a separate report, the Labour Department said initial claims for state jobless benefits rose 3,000 to a seasonally adjusted 259,000 for the week ended Oct 17.

Still, they remained not too far from levels last seen in late 1973 and it was the 33rd straight week that claims were below the 300,000 threshold, which is normally associated with a firming jobs market.

At current levels, there is not much scope for claims to fall further and the very low level of layoffs suggests the labour market remains in good shape, despite a recent abrupt slowdown in job growth.

"This data signals that companies remain extremely unwilling to let go of labour and that the number of short-term unemployed remains very low," said John Ryding, chief economist at RDQ Economics in New York.

The four-week moving average of claims, considered a better measure of labor market trends as it strips out week-to-week volatility, slipped 2,000 to 263,250 last week, the lowest level since December 1973.

The claims report covered the period during which the government surveyed employers for the payrolls portion of October's unemployment report. The four-week moving average of claims fell 9,250 between the September and October survey periods. That suggested a pick-up in job gains this month.

Nonfarm payroll gains in August and September averaged 139,000, the weakest two-month rise since January last year.

The claims report showed the number of people still receiving benefits after an initial week of aid rose 6,000 to 2.17 million in the week ended Oct 10.

The four-week moving average of continuing claims was the lowest since late 2000, suggesting a further decline in the unemployment rate from 5.1 per cent in September.

"With August and September being notorious for initially under-reporting job gains, today's data add to the case that employment growth will pick up in October and the unemployment rate will continue to grind lower," said Ryding.