It was the steepest climb in new home sales in six and a half years, since a 16.7 percent increase in April 1993, the government said.
Sales were up significantly in all parts of the country except the Northeast, where they fell.
October's growth was bigger than many analysts expected. They were forecasting sales to rise to 875,000 units.
In September, new-home sales plunged 8.1 percent to an annual rate of 848,000 units, not as bad as the 12.8 percent decline the government previously estimated.
In a separate report, the Labor Department said 291,000 Americans filed new claims for unemployment benefits last week - an increase of 15,000. That marked the highest level since Nov. 6.
The higher-than-expected increase followed back-to-back sharp declines in the two previous weeks.
The growth in new-home sales came despite an upward spiral in mortgage rates.
The monthly average for a 30-year fixed-rate mortgage in October was 7.85 percent, up from September's 7.82 percent and much higher than the 6.71 percent rate for October 1998.
The National Association of Realtors said Monday that higher mortgage rates drove down sales of existing homes by 6.6 percent in October, the lowest level in almost two years.
The report will trouble the Federal Reserve, which has been counting on a slowdown in housing activity to calm consumer spending. The Fed has raised overnight interest rates three times in the past five months in a bid to bring economic growth down to a more comfortable level.
Economists believe Fed policy-makers will leave rates unchanged when they meet next on Dec. 21, citing concerns about the Y2K computer changeover. However, many economists have raised their expectations that the Fed will bump up rates again early next year.
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