By Lucia Mutikani

WASHINGTON (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.

Signed contracts, which become sales after a month or two, increased 5.0 percent in October. November marked the third straight month of gains.

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 and the second straight month of growth was driven by a rebound in orders.

The reports 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.

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.

"The very early indications do not point to a slowdown in economic activity ahead of the fiscal cliff," said John Ryding, chief economist at RDQ Economics in New York.

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 at a 1.2 percent rate.

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 broad trend in pending home sales mirrors that of the broader housing market and is, yet again, another indicator suggesting that the recovery in housing has broadened and has sustained momentum," said Michael Gapen, a senior economist at Barclays in New York.

(Reporting By Lucia Mutikani; Editing by Chizu Nomiyama)