Housing starts and building permits fell in April and factory output slumped as automobile part shortage crimped production, showing the economy off to a weak start in the second quarter.

Groundbreaking for new housing dropped 10.6 percent to an annual rate of 523,000 units as a glut of homes on the market discouraged new projects, a Commerce Department report showed on Tuesday. March's starts were revised up to a 585,000-unit pace from the previously reported rate of 549,000 units.

The report pointed to prolonged weakness for the sector. Economists had forecast housing starts rising to a 568,000-unit rate. Compared to April last year, residential construction was down 23.9 percent, the largest decline since October 2009.

Starts in the South slumped to a two-year low.

We're still struggling to find the bottom here for the housing market. It does not bode well for construction in the near term, and there's a good deal of overhang in terms of inventory, said Michael Woolfolk a senior currency strategist at BNY Mellon in New York.

A separate report showed the Japanese earthquake had hit U.S. manufacturing output, which fell 0.4 percent in April after 9 consecutive monthly increases, the Federal Reserve said. Overall industrial production was flat, buoyed by gains in mining and utilities.

Excluding cars and parts, manufacturing output rose 0.2 percent.

Capacity utilization, a measure of how close to flat out factories are running, slid unexpectedly in April, suggesting scant inflationary pressures in the world's largest economy.

U.S. stock indexes opened lower after the data, while Treasury debt prices extended gains on the weaker-than-forecast industrial production report.

Residential construction is being crowded out by an oversupply of used homes on the market, in particular, foreclosed properties, which sell well below their value.

In March, the spread between the prices of new and previously owned houses was about $54,200.

Home builders' sentiment was flat in May, the National Association of Home Builders said on Monday.

Though builders expected a modest improvement in sales during spring, they anticipated market conditions to weaken in the next six months.

Residential construction accounts for about 2.2 percent of gross domestic product. Investment in home building contracted in the first quarter after a modest increase in the last three months of 2010.

Groundbreaking last month was depressed by a 24.1 percent tumble in the volatile multi-family homes sector, where starts for buildings with five or more units dropped 28.3 percent. Single-family home construction fell 5.1 percent.

New building permits dropped 4.0 percent to a 551,000-unit pace last month. March's permits were revised down to a 574,000-unit pace and economists had expected overall building permits in April to remain unchanged at the previously reported 585,000-unit pace.

Permits were held down last month by an 8.8 percent drop in the multi-family segment. Permits to build single-family homes slipped 1.8 percent.

New home completions rose 4.1 percent to 554,000 units in April.

(Additional reporting by Mark Felsenthal; Editing by Neil Stempleman)