By Lucia Mutikani

WASHINGTON (Reuters) - Pending sales of previously owned U.S. homes fell in October, while chain store sales for the first week of December declined as the economic outlook continued to deteriorate, data showed on Tuesday.

Although the drop in pending home sales was unexpectedly small, analysts said a key reason was rising foreclosure sales, with homes being disposed off at discount prices.

Coupled with news that chain store sales dropped in the week ended December 6 after the rush to take advantage of post-Thanksgiving discounts, the data provided evidence the year-long recession gripping the U.S. was far from over.

The reports backed views that the Federal Reserve would cut interest rates by a half-percentage point to 0.5 percent next week. That would be the lowest on records dating to July 1954.

The National Association of Realtors said its Pending Home Sales Index, based on contracts signed in October, slipped 0.7 percent to 88.9 after falling 4.3 percent in September. Economists had expected a 3.2 percent October decline.

"The (pending home sales) index has been trending higher in a choppy fashion over the past nine months, and is now up 7.1 percent from its trough," said Zach Pandl, an economist at Barclays Capital in New York.

"In our view, the rise partly reflects higher foreclosure activity which, although a positive development, suggests that the pressure on home prices is likely to continue."

DATA SOMEWHAT ENCOURAGING

Some economists were especially encouraged that pending home sales had not fallen sharply in October since the economy more broadly seemed to take a sharp turn for the worse after Lehman Brothers filed for bankruptcy and stock prices plunged.

"We are relieved that the dip in the index was not bigger," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in New York.

"The bottom line seems to be that the vulture investors who have supported the market in recent months are still active. The plunge in mortgage rates should bring in more buyers over the next few months," he said.

U.S. government bond prices, which tend to benefit from any bad news about the economy, pared some gains on the report.

The collapse of the U.S. housing market has unleashed the worst financial crisis since the Great Depression and plunged many major economies into recession.

The International Council of Shopping Centres said sales slipped 0.8 percent in the December 6 week after rising 0.1 percent the prior week.

"The tough economic and retail environment, which continued into early December, is likely to dominate the full month's sales performance as well," said Michael P. Niemira, ICSC chief economist in New York.

The Johnson Redbook Retail Sales Index also fell 0.8 percent in the first week of December after a 0.4 percent drop the prior week.

Last week, leading U.S. retailers reported dismal sales for November, setting the tone for a dour retail sales report on Friday. Analysts polled by Reuters forecast retail sales dropping 1.9 percent in November after posting a record decline of 2.8 percent in October.

In yet another sign of the worsening economic outlook, the Institute for Supply Management said the tough conditions seen in the second half of 2008 were expected to continue in 2009 in manufacturing, with the sector's revenues falling 1.1 percent.

"Manufacturing purchasing and supply executives lack their usual optimism about their organizations' prospects as they consider the first half of 2009. However they are somewhat more positive about the second half," said Norbert Ore, chairman of the ISM manufacturing business survey committee in New York.

The Organisation for Economic Co-operation and Development warned of even tougher times ahead and urged more injections of public money to help pull the economy out of trouble.

(Additional reporting by Ellen Freilich in New York and Brian Love in Paris; Editing by Chris Reese)