New U.S. housing starts fell in March after a surprise surge the previous month, government data showed on Thursday, dealing a blow to hopes that housing market stability was on the horizon.

The Commerce Department said housing starts fell 10.8 percent to a seasonally adjusted annual rate of 510,000 units, the second lowest on records dating back to 1959, from February's downwardly revised 572,000 units.

House starts in the West region, which has been hit hard by the housing slump, fell 26.3 percent to a record low 73,000 rate.

Analysts polled by Reuters had expected an overall annual rate of 540,000 units for March.

It's disappointing. Half a million in starts is real low. Things are hitting the floor. I think it will turnaround over the next few months, said Kurt Karl, chief U.S. economist at Swiss Re in New York.

S&P 500 equity index futures added to gains after data while U.S. Treasury debt prices pared losses. The dollar was little changed versus yen.

The fall in groundbreaking activity follow recent data that had shown some signs that the 16-month-old recession was moderating somewhat. Housing is at the center of the downturn, which is on track next month to become the longest since the Great Depression.

Collapsing house prices, coupled with rising unemployment, are forcing consumers to scale back on discretionary spending.

New building permits, which give a sense of future home construction, dropped 9 percent to a record low 513,000 units, from 564,000 units in February, the Commerce Department said. That was well below analysts' estimates of 550,000.

Building completions rose 3.5 percent to 824,000 units.

A National Association of Home Builders survey on Wednesday showed U.S. home builder sentiment jumped to a five-year high in April.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)