Permits to build new U.S. homes surged in March to a 17-month peak and construction activity was the most vigorous in more than a year, providing fresh evidence that economic prospects are brightening.

But a surprising slump in U.S. consumer confidence this month indicated that average Americans remain frustrated at the slow pace of recovery, which is not generating strong jobs growth.

The recovery is broadening, but it doesn't appear the consumers are seeing it, said Ryan Sweet, a senior economist at Moody's Economy.com in West Chester, Pennsylvania.

The encouraging thing is it's broadening out from manufacturing to services and that's very important for both the sustainability and durability of the recovery.

Data such as retail sales, trade and orders for long-lasting manufactured goods have indicated the recovery from the worst downturn in 70 years is gaining muscle and filtering to other sectors. Payrolls resumed growth in March.

Building permits, an indicator of future activity, jumped 7.5 percent to a 685,000-unit-a-year pace last month, the Commerce Department said on Friday. Markets had expected a 630,000 unit pace.

New home construction hit its highest level since November 2008 but most of it was in the volatile multifamily segment.

Separately, the Thomson Reuters/University of Michigan's Surveys of Consumers index of consumer sentiment slipped to a five-month low of 69.5 in early April from 73.6 at the end of March. That was below market expectations for 75.0.

Boosting consumer spending, which fuels 70 percent of total production of goods and services, is critical to get a self-sustaining recovery on track.

The data had little impact on U.S. financial markets, which were fixated on other events. U.S. stocks tumbled, snapping a six-day winning streak after investment bank Goldman Sachs was charged with fraud by the U.S. securities market regulator. Corporate earnings missing raised forecasts also soured the mood.

The risk aversion triggered by the fraud charges against Goldman Sachs related to subprime loans bolstered the safe-haven appeal of U.S. government bonds and the dollar.

CONFIDENCE DATA AT ODDS WITH SPENDING

The drop in consumer confidence, a proxy for spending, is at odds with the rise in retail sales seen in recent months.

The confidence numbers do not seem to match up with the strength in retail sales. It could be a little bit of frustration that as you see the signs of recovery, the labor market is still not vibrant, said Nick Kalivas, vice president of financial research at MF Global in Chicago.

I don't put a lot of stock into them because it is important to see what people are actually doing as opposed to what they are saying.

Retail sales have risen even as the unemployment rate has remained elevated at 9.7 percent and income growth has been sluggish. Analysts reckon that an improving economic and jobs picture are helping to prop up spending.

The recovery story was partially illustrated in Bank of America Corp's financial results on Friday, which showed the bank posting its first quarterly profit since summer 2009 and setting aside less money to cover bad loans.

The bank's lower credit provision signals that borrower defaults may be stabilizing as the economy improves.

Despite frustration with the pace of the economic recovery, consumers invested in new residential property last month. House starts rose 1.6 percent to a higher than expected seasonally adjusted annual rate of 626,000 units.

February's housing starts were revised up to show a 1.1 percent increase, which was previously reported as a 5.9 percent drop. Markets had expected housing starts to rise to 610,000 units in March.

The rise was probably due to a combination of consumers rushing to take advantage of a homebuyer tax credit and a snap back from February's snowstorms which had held back activity.

Prospective homeowners have to sign contracts by the end of this month and close them by end of June to take advantage of the tax break.

Starts for the volatile multifamily segment jumped 18.8 percent jump in March, while groundbreaking for single-family homes slipped 0.9 percent.

The data was a welcome relief after the housing market recovery appeared to have stalled in recent months and sales dropped following strong gains in the second half of 2009.

Economists at Goldman Sachs said the report suggested that the apparent sharp drop in residential investment in the first quarter will end in the second quarter.

A National Association of Home Builders survey on Thursday showed home-builder sentiment rose to a seven-month high in April. New building permits increased across both segments of the housing market and were up 34.1 percent from March 2009, Friday's Commerce Department data showed, the biggest year-on-year gain since February 1992.

The surge in single-family permits should be regarded as a very positive sign that the recovery is gaining some momentum even within the weakest sector of the economy, said Alan Ruskin, chief international strategist at RBS Securities in Stamford, Connecticut.

(Additional reporting by Richard Leong in Washington; Editing by Andrea Ricci)

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