WASHINGTON (AP) -- Sales of new homes rose by 9.4 percent in August, the Commerce Department said Monday, as mortgage interest rates remained at low enough levels to continue enticing buyers worried about future rate hikes.

New home sales climbed to a seasonally adjusted annual rate of 1.18 million homes, up from a revised 1.08 million sales pace in July.

The increase was the largest since December 2000, when new home sales jumped by 11.7 percent.

In July, new home sales fell by 7.3 percent.

The average sales price was $267,000 in August. Buyers had plenty to choose from, with 404,000 new homes for sale at the end of August, the most since October 1979.

The West and South were the hottest markets for new home sales in August, posting increases of 19.5 percent and 12.6 percent, respectively. Sales in the Northeast rose by 6.1 percent, but dropped by 8.3 percent in the Midwest.

Economists expect some volatility in sales in the Southeast because of the hurricanes that have battered Florida and the East Coast. But overall, "housing demand should hold up quite well," said Steve Stanley, chief economist at RBS Greenwich Capital in Greenwich, Conn. "We look for employment and income growth to pick up in the coming months, providing additional support."

Mortgage rates around the country dropped last week, with 30-year mortgages sinking to their lowest level in five months. Rates have slowly drifted downward as economic activity cooled in the late spring and early summer and inflation fears receded.

Mortgages rates have remained restrained even as the Federal Reserve has raised a key short-term interest rate. Last week the Fed bumped up the target for its federal funds rate to 1.75 percent, marking the third rate increase since June.

Economists predict that low mortgage rates will guarantee that the housing industry will continue at a robust pace, both in new housing construction and overall home sales.