U.S. housing starts rose more than expected in March to their highest level since November 2008 and permits to build new homes scaled a 17-month peak, offering hope the housing market recovery remained on course.

The Commerce Department said on Friday housing starts rose 1.6 percent to a 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.

Analysts polled by Reuters had expected housing starts to rise to 610,000 units. Compared to March last year, starts were 20.2 percent higher.

Some of the worries about the housing market have been alleviated by this report, said Cary Leahey, an economist at Decision Economics in New York.

U.S. stock index futures held on to small losses after the data, while Treasury debt prices were steady at slightly higher levels. The U.S. dollar was little changed.

Groundbreaking for single-family homes slipped 0.9 percent last month to an annual rate of 531,000 units after rising 5.7 percent in February. Starts for the volatile multifamily segment surged 18.8 percent to a 95,000-unit annual pace after falling 21.6 percent the prior month.

The housing market recovery has stalled in recent months and sales have dropped after strong gains in the second half of 2009. The sector, a key factor behind the worst economic downturn since the Great Depression, remains one of the headwinds confronting the recovery.

Analysts are cautiously optimistic the improving economic conditions, particularly the resumption of job growth, will help put the sector back on an upward trend and March's housing starts data will be seen as a step in that direction.

A National Association of Home Builders survey on Thursday showed home-builder sentiment rose to a seven-month high in April as consumers rushed to take advantage of a home buyer tax credit. Better economic conditions also helped.

New building permits, which give a sense of future home construction, jumped 7.5 percent to a 685,000-unit pace last month -- the highest level since October 2008, the Commerce Department said.

That compared to analysts' forecasts for 630,000 units. Permits rose 2.4 percent in February.

Permits were up 34.1 percent from March 2009, the biggest year-on-year gain since February 1992.

New home completions fell 3.1 percent to a record low 656,000 units. The inventory of total houses under construction dropped 1.4 percent to an all-time low of 489,000 units in March, while the total number of units authorized but not yet started soared 7.5 percent to 103,200 units -- the highest level since June.

(Reporting by Lucia Mutikani, Additional reporting Ellen Freilich; Editing by Andrea Ricci)