WASHINGTON - New U.S. housing starts unexpectedly fell in December, likely the result of unusually cold weather, while producer prices rose for a third straight month.

The Commerce Department said on Wednesday housing starts fell 4 percent to a seasonally adjusted annual rate of 557,000 units, pulled down by a drop in groundbreaking activity for single-family dwellings. Analysts polled by Reuters had expected housing starts to rise to 580,000 units.

Building permits, however, soared in December.

At first glance housing starts were disappointing. But, they were offset by a huge jump in building permits. The data is suggestive of a continued gain in housing construction over the next several months, said Michelle Meyer, economist at Barclays Capital in New York.

November's housing starts were revised upwards to 580,000 units from the previously reported 574,000 units.

A separate report from the Labor Department showed producer prices rose 0.2 percent last month as food prices surged, and recorded their largest year-on-year gain since October 2008.

U.S. stock index futures held losses, while government bond prices were steady at higher prices. The U.S. dollar was firmer against the euro.

Groundbreaking activity dropped a record 38.8 percent to an all-time low of 553,000 units for the whole of 2009.

Starts for single-family homes fell 6.9 percent last month to an annual rate of 456,000 units after rising 4.0 percent in November. Groundbreaking for the volatile multifamily segment rose 12.2 percent to a 101,000 unit annual pace, after surging 69.8 percent in November.

Housing is on the mend after a three-year slump and new home construction contributed to economic growth in the third quarter of 2009 for the first time since 2005.

However data such as pending home sales and homebuilder sentiment have hinted at potential weakness in a sector whose collapse triggered the most brutal U.S. recession since the Great Depression of the 1930s.

Even though producer prices rose for a third straight month, inflation pressures remain tame.

Muted inflation pressures and the unsettled housing market should allow the Federal Reserve to honor its pledge to keep overnight lending low for an extended period. Officials next meet on January 26-27 to deliberate on monetary policy.

New building permits, which give a sense of future home construction, rose 10.9 percent to 653,000 units last month, the highest since October 2008.

That compared to analysts' forecasts for 590,000 units. For the whole of 2009, permits dropped 36.9 percent, the department said.

The inventory of total houses under construction dropped 3.8 percent to a record low of 511,000 units last month, while the total number of buildings authorized but not yet started rose 8.4 percent to 95,800 units.

In a separate report, the Mortgage Bankers Association said demand for U.S. home loans rose last week for the third straight week as a drop in mortgage rates to a one-month low stoked refinancing.

The Mortgage Bankers Association's index of total home loan applications rose 9.1 percent to a seasonally adjusted 575.9. The increase was driven by a 10.7 percent jump in the refinancing index, while home purchase loan demand rose 4.4 percent to 223.0.

Average 30-year mortgage rates dropped to 5 percent last week, the group said.

(Reporting by Lucia Mutikani and Lisa Lambert in Washington and Lynn Adler and Julie Haviv in New York; Editing by Andrea Ricci)

Inflation Fall