U.S. housing starts touched a 1-1/2 year high in April, but a drop in permits to a six-month low suggested housing market recovery will remain slow.

Housing starts rose 5.8 percent to a seasonally adjusted annual rate of 672,000 units, the Commerce Department said on Tuesday, likely supported by the looming expiry of a home buyer tax credit. March's housing starts were revised to show a 5 percent increase, instead of a 1.6 percent gain.

Markets had expected housing starts to rise to 650,000 units. Compared to April last year, starts were up 40.9 percent, the largest increase since March 1994.

It is still a very moderate recovery in housing, it is not a V-recovery. But it is supporting growth now, which is good news, said Kurt Karl, chief U.S. economist at Swiss Re, in New York.

Separately, prices paid by farms and factories dipped 0.1 percent last month following a 0.7 percent rise in March, the Labor Department said. That compared to market expectations for a 0.1 percent gain.

U.S. stock index futures held gains after the data, while Treasury debt prices remained flat. The U.S. dollar stayed lower against euro.

Groundbreaking for single-family homes rose 10.2 percent last month to an annual rate of 593,000 units after a 2.1 percent increase in March. Starts for the volatile multifamily segment tumbled 18.6 percent to a 79,000-unit annual pace, partially reversing the prior month's 24.4 percent surge.

A National Association of Home Builders survey on Monday showed home-builder sentiment rose to its highest level in more than 2-1/2 years in May, encouraged by the strengthening economic recovery, which builders hope will support home construction when the incentives end.

Investment in new home construction contracted in the first quarter after two straight quarters of growth. A flood of foreclosed properties is hampering the housing sector's recovery from a three year slump.

New building permits, which give a sense of future home construction, dropped 11.5 percent to a 606,000-unit pace last month, the lowest level since October 2009 the Commerce Department said.

With the housing market still shaky, inflation subdued and worries over the debt outlook in Europe, the Federal Reserve has room to extend its ultra low interest rate policy.

Core prices, which exclude food and energy goods, climbed 0.2 percent from the prior month, and were up just 1 percent compared to a year earlier, at the bottom of the Fed's presumed comfort range between 1 percent and 2 percent.

(Reporting by Lucia Mutikani and Pedro Nicolaci da Costa; Editing by Neil Stempleman)