(Corrects to add dropped word "homes" in first paragraph)
* U.S. existing homes sales fell in January
* Median home prices, inventories slid in January
* Mortgage applications dropped last week
By Lucia Mutikani
WASHINGTON, Feb 25 (Reuters) - Sales of previously owned U.S. homes plunged in January, reversing the previous month's surprise jump, and prices spiraled down to a six-year low as the deep recession and rising joblessness took its toll.
A drop in number of unsold homes offered some hope for the housing market, the main trigger of the worst financial crisis in the post-war period.
The pace of sales of existing home fell 5.3 percent to a 4.49 million-unit annual rate in January, the National Association of Realtors (NAR) said, from the 4.74 million rate reported for December.
U.S. stocks extended losses on the dour housing report. Government bond prices, which normally rally on weak economic data, were depressed by worries about the amount of debt the Obama administration will issue to rescue the economy.
"The housing market remains the Achilles heel of the U.S. economy as prices fall and demand wanes," said Kathy Lien, director of currency research at GFT Forex in New York.
The median national home price declined 14.8 percent from a year ago to $170,300, the lowest since March 2003 when the median was $169,400, the NAR said.
Lawrence Yun, chief economist at the NAR said roughly two in five home sales were "distress" transactions where the mortgage company must erase some of the original loan amount in order to complete the sale.
"We are seeing worsening economic conditions - loss of housing wealth and in the stock market ... Very low confidence," Yun told reporters.
The collapse of the U.S. housing market and the resulting global credit crisis pushed the domestic economy into recession in December 2007.
Few buyers are willing to take advantage of the lowest home prices in several years as most households are experiencing sharp declines in wealth, compounded by rising unemployment and collapsing stock market prices.
BUYERS HOLDING BACK
"Home prices are continuing to slide. They're down 14.8 percent over the past year. That makes housing very affordable relative to income, but buyers are still holding back," said Gary Thayer, a senior economist at Wachovia Securities in St. Louis, Missouri.
"We probably need to see a little more confidence in the economy to get buyers back into the housing market and that's just not happening yet."
A separate report showed applications for mortgages fell last week as mortgage rates edged higher. The decline followed recent robust increases in applications after the government unveiled its strongest action yet to aid struggling homeowners.
The Mortgage Bankers Association's seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, fell 15.1 percent to 743.5 in the week ended Feb. 20 after surging 45.7 percent the prior week.
A decline in the glut of unsold homes offered a glimmer of hope that the housing market could find some stability later this year, a key ingredient for a turnaround in the economy's fortunes.
The inventory of existing homes for sale fell 2.7 percent to 3.60 million from the 3.70 million overstock reported in December, the NAR said.
"The good news is that the inventory of unsold homes fell a bit more," said Pierre Ellis, a senior economist at Decision Economics in New York.
However, sales fell faster than supply of unsold homes, and the 9.6 months it would take at the current pace to clear the market was up from December's 9.4 months.
The NAR said it expected a recent federal stimulus package and other rescue measures to spur 900,000 home sales this year. Still, some economists don't expect Washington's encouragement or lower prices to quickly restore the confidence of prospective buyers. (Additional reporting by Patrick Rucker in Washington and Julie Haviv and Ellen Freilich in New York; Editing by Tom Hals)