* August home prices +0.3 pct m/m, -2.3 pct y/y
* New home prices rose m/m in 35 cities versus 31 in July
* Supply glut seen capping gains in many cities
* Rebound in new housing starts, investment needed for recovery (Adds national year-on-year figure, buyer quotes)
By Xiaoyi Shao and Nicholas Heath
BEIJING, Sept 18 (Reuters) - Home prices in China rose for a fourth consecutive month in August, offering hope that the ailing property sector is becoming less of a drag on the slowing economy.
But analysts do not expect a full-blown turnaround any time soon, as a huge overhang of unsold homes discourages new construction and investment in all but the biggest cities.
Average new home prices inched up 0.3 percent in August from the previous month, according to Reuters calculations based on data released by the National Statistics Bureau (NBS) on Friday, the same pace as in July.
Price gains were recorded in 35 of the 70 cities the NBS surveyed, up from 31 in the previous month.
The NBS said that, on a nationwide basis, prices rose 1.7 percent year-on-year in August, marking the first increase since September 2014. A Reuters calculation, based on the bureau's data, showed prices were still down 2.3 percent from a year ago.
The property sector accounts for 15 percent of China's gross domestic product, so even modest signs of improvement would relieve some pressure on the economy, which is expected to expand at its slowest pace in a quarter of a century this year.
But economists at Standard Chartered say sentiment in the property market is still fragile, and believe it remains one of the biggest headwinds for the economy, especially as growth in other areas slows.
A StanChart survey of 30 non-listed developers in medium-sized cities such as Hangzhou in July found that inventories are being worked off only slowly, construction activity remains weak and access to financing is becoming more difficult despite lower funding costs.
"Our surveyed developers expected further policy loosening in the second half of 2015," StanChart said.
Indeed, China relaxed its housing investment rules for the second time in two weeks on Sept. 1 by slashing the downpayment level for some second-home buyers. Days earlier, it loosened rules for foreigners to buy real estate.
INVESTMENT RECOVERY IS KEY
While home sales and prices have picked up, growth in China's property investment in the first eight months of the year slowed to 3.5 percent from a year earlier, the lowest since early 2009, while new construction starts plunged by nearly 17 percent, depressing demand for materials from cement to steel.