U.S. housing starts rose more than expected in January to their highest rate in four months but permits for future home construction dropped sharply after hefty gains the prior month, according to a government report on Wednesday that showed the housing market still bouncing along the bottom.

The Commerce Department said housing starts jumped 14.6 percent to a seasonally adjusted annual rate of 596,000 units, the highest since September. December's starts were revised down to a 520,000-unit pace from the previously reported rate of 530,000 units.

Economists polled by Reuters had forecast housing starts edging up to a 554,000-unit rate. Compared to January last year, residential construction was down 2.6 percent.

Groundbreaking last month was lifted by a 77.7 percent jump in volatile multi-family homes. Single-family home construction fell 1.0 percent.

The housing market recovery is being hobbled by an over-supply of homes that is depressing prices. A high unemployment rate also means the sector, which was at the heart of the worst recession since the 1930s, will struggle to recover even as the broader economy gains momentum.

An independent survey on Tuesday showed sentiment among home builders hovering near all-time lows in February.

New building permits dropped 10.4 percent to a 562,000-unit pace last month, partially reversing December's 15.3 percent surge that came ahead of changes in building codes in three states. Permits were pulled down last month by a 23.8 percent plunge in the multi-family segment. Single-family unit permits fell 4.8 percent.

Analysts had expected overall building permits to fall to a 560,000-unit pace in January.

New home completions fell 9.5 percent to a record low 512,000 units in January.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)