WASHINGTON (Reuters) - Home sales contracts signed in June unexpectedly rose across the country to its highest level since October, but still were well below year-earlier levels, a real estate trade group said on Thursday.

The National Association of Realtors said its Pending Home Sales Index, which is based on contracts signed in June, was up 5.3 percent to 89.0 from a downwardly revised 84.5 in May.

It was the highest reading for the index since October, when it was at 89.8.

The pickup in June signings sharply contrasted with forecasts by economists polled by Reuters who had expected home sales contract signings to decline 1 percent.

The association's senior economist, Lawrence Yun, said the swings in monthly signings "indicates a housing market in transition" but it nonetheless was encouraging.

"This is welcome news because a rise in contract activity is necessary for an overall housing recovery," Yun said.

Contract signings rose in June by 9.3 percent in the South, by 4.6 percent in the West, 3.4 percent in the Northeast and 1.3 percent in the Midwest.

The realtors said the improvement in contract signings "appears to be broadening" and expressed hope that housing legislation signed into law last month will further encourage buyers. The legislation offers a tax credit to first-time home buyers and aims to ward off some foreclosures.

Still, contract signings in June were 12.3 percent below levels in June 2007, a measure of how far the housing market has to go to begin recovering from its worst slump since the Great Depression.

(Reporting by Glenn Somerville; Editing by Walker Simon)