* Forest sector suffered one of worst years in 2008

* U.S. housing bust main cause

* Signs of recovery in U.S. housing herald upturn

* Wood use for energy growing fast

Signs of recovery in the U.S. housing market and growing demand for wood as an energy source could herald a recovery in demand for forestry products, a United Nations agency said on Tuesday.

Officials from the U.N. Economic Commission for Europe (UNECE), which covers North America, Europe and the former Soviet Union, made the forecasts of recovery at the presentation of a report showing the forestry products industry had suffered one of its biggest ever drops in consumption last year.

We have just seen the early indications of a turn-up in housing in the United States, and that is the new housing starts have ceased to go down, which is a positive sign to us that perhaps we have hit the bottom, Ed Pepke, one of the authors of the report, told a news conference.

He said U.S. new house building needed to return to about a million a year, from unsustainable levels of 2 million or more a few years ago.

ENERGY DEMAND

Despite the financial crisis, which was triggered by lax U.S. mortgage lending, demand for wood as an energy source had been growing, UNECE said.

World wood fuel pellet production grew by 20 percent in 2008 to nearly 10 million tonnes and is expected to approach 12 million this year, with capacity doubling to more than 20 million by 2012, it said.

Europe is the largest consumer and producer of wood fuel pellets, while Canada is the single largest exporter, mainly to Europe, UNECE said in a statement.

Asia could become an important consumer, too, as the first large-scale industrial projects to co-fire coal with wood biomass took place in Japan in 2008, it said.

Energy