WASHINGTON (Reuters) - The Senate was on course for a Saturday vote to approve a major housing market rescue bill offering a lifeline to mortgage finance giants Fannie Mae and Freddie Mac, and bond market action on Thursday indicated investors were encouraged by the progress.

The depth of the housing market slump and its impact on the U.S. economy was underscored, at the same time, by new data showing the pace of sales of existing homes hit a 10-year low and by more bank losses on real estate setbacks.

Bill Gross, chief investment officer of Pacific Investment Management Co, the world's biggest bond fund known as Pimco, said the housing bill -- expected to be signed into law soon by President George W. Bush -- was "the best way to begin the long journey back to normalcy."

Fannie and Freddie, both government-sponsored enterprises, or GSEs, own or guarantee nearly half of the $12 trillion in outstanding U.S. home mortgage debt and are playing an increasingly crucial role as the housing market struggles through its worst downturn since the Great Depression.

The bill was drawing bipartisan support in the Senate, despite some efforts to block it. On Wednesday, the House of Representatives approved the bill by a 272-152 vote, hours after Bush dropped a threat to veto the election-year measure.

New Hampshire Republican Sen. Judd Gregg, speaking on the Senate floor, called the housing bill "a necessary step. ... This is something we're simply going to have to do."

A handful of Senate Republicans were trying to amend and delay the bill. But they will run out of options on Saturday, allowing the Senate to vote, said aides from both parties.

A last-minute deal could bring an earlier vote on Friday, but lawmakers and aides said that looked unlikely. Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said the bill was "about to pass, I believe."

The bill would offer new emergency financing to Fannie and Freddie, the nation's largest mortgage finance companies, while setting up a new regulator for them and creating a Federal Housing Administration fund to help thousands of distressed homeowners refinance into more affordable mortgages.

Shares of Fannie Mae and Freddie Mac, meanwhile, tumbled on Thursday amid a broad stock market sell-off as the slowing home sales reported by the National Association of Realtors prompted investors to take profits in financial shares, after a rally over the past week.

Fannie closed off 19.9 percent at $12.02 on the New York Stock Exchange; Freddie shares fell 18.4 percent to $8.81.

MORTGAGE RATES SPIKE

With Congress hoping that its measure would restore some economic stability, a survey released on Thursday by Freddie Mac reported that U.S. mortgage rates spiked upward this week amid fears of rising inflation, housing market weakness and possible Federal Reserve short-term interest rate increases.

Regional bank National City Corp, based in Cleveland, posted a $1.76 billion second-quarter loss on Thursday, hurt in part by real estate loan losses.

Although the housing bill has boosted stock market confidence in the GSEs' ability to ride out the housing slump, other news on Thursday drove home to investors the severity of the problems ahead, said Michael Cheah, portfolio manager at AIG SunAmerica Asset Management in Jersey City, New Jersey.

"The big picture is that home prices are still going to drop more, even from here," Cheah said.

As shares sold off, risk premiums on Fannie and Freddie agency notes narrowed, with yield spreads as much as 8 basis points tighter on Thursday, indicating debt markets were encouraged by Congress' progress with the housing bill.

New York Federal Reserve Bank President Timothy Geither told a House committee on Thursday that recent financial crises justify big changes in financial oversight at Fannie and Freddie, a project that lawmakers are targeting for 2009.

Securities and Exchange Commission Chairman Christopher Cox told the same hearing his agency would soon offer a proposal to expand emergency curbs on short selling of 19 financial stocks, including Fannie and Freddie, to the entire market.

In the Senate, hopes for a quick housing bill vote faded on Wednesday when South Carolina Republican Sen. Jim DeMint tried to attach an amendment opposed by Democrats. Senate Majority Leader Harry Reid, a Nevada Democrat, invoked a procedural tactic to limit debate, which set up a stand-off with DeMint, whose ability to block a final vote will expire by Saturday.

On Friday, the House Financial Services Committee will hold a hearing on the role of mortgage servicers in the market.

(Additional reporting by Steven C. Johnson, John Parry, Jonathan Stempel and Lynn Adler in New York, with Richard Cowan and Alister Bull in Washington; Editing by Leslie Adler)

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