U.S. housing starts and permits fell to record lows in April, weighed down by a slump in multifamily units, according to data on Tuesday that still hinted the U.S. recession may be drawing to a close.

The Commerce Department said housing starts fell 12.8 percent to an annual rate of 458,000 units last month, the lowest since records began in January 1959.

The drop reflected a 46.1 percent plunge in breaking ground for multifamily units and indicated homebuilding remains a drag on the economy. However, starts for single-family homes, rose 2.8 percent, a second straight gain that showed the worst-hit part of the market was stabilizing.

There is some stability. When you look at the housing starts numbers, they are going to be vulnerable to kind of two steps forward, one step back, said Nick Kalivas, vice president of financial research at MF Global in Chicago. Housing starts are at a level where they are bottoming out.

Analysts said the decline in starts should help the housing market work through a huge stock of unsold homes and lay the foundation for a recovery from a three-year slump, which was the main trigger of the economic downturn.

Compared to the same period last year, housing starts were down 54.2 percent.

This is essentially a good thing. It means supply will eventually come back in line with demand, said Joseph Brusuelas, an economist at Moody's Economy.com in West Chester, Pennsylvania.

Shares of U.S. homebuilders fluctuated in choppy trade. The Dow Jones home construction index ended slightly lower following strong gains on Monday after data showed homebuilder sentiment had improved.

In related news, shares of Home Depot Inc, the world's largest home improvement chain, fell 5 percent after the company reported an almost 10 percent drop in quarterly sales.

GLIMMERS OF HOPE

New building permits, which give a sense of future construction activity, fell 3.3 percent to 494,000 units in April, the lowest since records were started in January 1960.

The decline in permits reflected a 19.9 percent decrease in new building plans for multifamily units. Building permits for single family homes rose 3.6 percent.

Compared to April of last year, permits were down 50.2 percent.

While housing activity continues to fall, the report still offered glimmers of hope for an economy in its 17th month of recession, according to analysts.

A National Association of Home Builders survey on Monday showed U.S. home builder sentiment surged to an eight-month high this month, with industry leaders hopeful the slump was nearing a bottom and market stability was around the corner.

Multifamily starts have hit or will soon hit bottom. Single-family starts may continue to test the bottom. In the second half of this year, however, they will be on a sustained but slow path to recovery, said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts.

A report on shopping activity at U.S. retail chains from the International Council of Shopping Centers and Goldman Sachs on Tuesday showed sales slid 1.2 percent last week, the biggest drop since late January, after two weeks of gains.

Both the ICSC-Goldman Sachs report and a separate index from Johnson Redbook showed sales off 0.3 percent from a year ago, a decline that ICSC noted was above recent lows.

High unemployment and strained incomes are cooling consumer demand.

(Additional reporting by Leah Schnurr in New York, Editing by Kenneth Barry)

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