It is actually diffiicult to add significant muscle mass while running a calorie deficit to lose weight, as the body tends to burn protein for energy, rather than creating new muscle tissue.
I agree with Archimedes that it is a common response for your muscles to retain water when starting/increasing an exercise program. But muscle is considerably denser than fat (check www.dailyspark.com/blog.asp?post=quiz_how_
for a great photo of this).
Without ST, up to 25% of your weight loss can come from lost muscle, rather than fat. ST is actually a very efficient fat burner, and helps ensure that more of your weight loss comes from fat alone. Given the difference in densities, this actually results in MORE lost inches (hence the pant size)
Burning fat is an all-body process, and you can't target where you lose weight from. Yes, you should be ST'ing your legs. But not because it reduces fat there, but because they are the largest muscles in your body, and give you the most return for your exercise buck.
And for ST to be effective, you need to be genuinely challenging your muscles. Light weights won't do it. Once you get to being able to do 12 reps of an exercise, it is time to switch up to a heavier weight/more challenging exercise.
What is the solution? To actually regularly track your measurements with the tape, and see what really is happenning to your body, rather than just going by 'feel'.