The pace of home construction rose 2.3 percent in June but building permit activity, a sign of future construction plans, sank to its lowest rate in 10 years, signaling further weakness in the listless housing market.

The Commerce Department said on Wednesday housing starts set an annual rate of 1.467 million units in June compared with a revised 1.434 million unit pace in May. Economists had forecast June housing starts to drop to a 1.45 million unit pace from the 1.474 million unit rate originally reported for May last month.

Building permits fell 7.5 percent in June to a pace of 1.406 million units. That's just above the 1.402 million unit rate seen in June 1997 and below the 1.48 million unit rate that economists had expected.

Wednesday's data comes a day after a report indicating that home-builder confidence is sinking as mortgages become more difficult to obtain, with banks tightening their lending standards.

The National Association of Homebuilders/Wells Fargo Housing Market Index dropped two points to 28 in June to the lowest level in more than 16 years. Readings below 50 indicate more builders view market conditions as poor rather than favorable.

The dollar inched up after the data because of the higher housing starts, while U.S. Treasury bonds were steady after another report showed little change in the inflation outlook.

Mortgage rates have been elevated in recent weeks compared to earlier in the year, putting a crimp in demand for home financing just as lenders stiffen loan underwriting.

Wednesday's data shows that housing will weaken further, said Christopher Low, chief economist for FTN Financial in New York, while the recent builder survey shows home builders have hardened to the fact that housing will not recover soon.

Inflation