WASHINGTON (Reuters) - Sales of previously owned homes fell by a sharp 7.4 percent in December, a real estate trade group said on Thursday, a sign that the slowing U.S. economy is now taking its toll on the housing market.

The National Association of Realtors said the annualized rate of home sales fell last month to 4.87 million from 5.26 million in November. The November pace was revised up from 5.22 million.

For the year, however, 5.03 million homes were sold. That was down 3.2 percent from 1999 levels, but still the second-highest level on record, the association said.

``A yellow flag has been raised over deteriorating conditions in the economy,'' said David Lereah, the association's chief economist, also attributing the falloff to harsh weather conditions.

He urged the Fed to continue cutting rates, a move widely expected when Federal Reserve policymakers meet next week.

``This report should raise eyebrows, especially at the Fed,'' he said. ``They must continue to be accommodating in the marketplace and lower rates.''

The association's president, Richard Mendenhall, said lower mortgage rates could help boost the housing market, forecasting existing-home sales to rise by 2.1 percent this year ``if we can avoid a recession.''.

The median price of an existing home edged up in December to $140,000 from $139,500 in November, while the supply of homes on the market increased slightly to 3.9 months' worth from 3.6 months' worth in November, the association said.