Groundbreaking for new homes fell 6.1 percent in July to the lowest pace in more than 10 years while building permit activity, a sign of future construction plans, sank to a nearly 11-year low, a government report on Thursday showed.

Dealing more bad news to the housing sector and financial markets, the Commerce Department said housing starts set an annual pace of 1.381 million units in July, lower than Wall Street forecasts for 1.405 million units as well as the upwardly revised 1.470 million rate for June. It was the lowest pace since the January 1997 rate of 1.355 million units.

Building permits fell 2.8 percent in July to an annual pace of 1.373 million, their lowest since October 1996 when they reached 1.358 million. Economists polled by Reuters had forecast July permits at 1.400 million after 1.413 million in June.

Compared with a year earlier, July home starts were off 20.9 percent, while permits were down 22.6 percent.

As lenders have tightened credit standards in response to major financial market turmoil in recent weeks, increasing numbers of potential buyers have been denied affordable mortgages, sending the home market into a downward spiral. Analysts said the data will add to market gloom.

The housing starts number just adds fuel to the fire. You've got financial markets in panic. It looks like fears are overriding the fundamentals and that may continue for a while, said Michael Darda, chief economist at MKM Partners LLC in Greenwich, Connecticut.

The data sent U.S. Treasury debt prices higher, while the dollar fell and stock index futures remained sharply lower.

U.S. home builder confidence ebbed to its lowest level in 16 years in a survey released on Wednesday. The National Association of Home Builders/Wells Fargo Housing Market Index dropped 2 points to 22 in August, while the level of prospective buyers dropped to its lowest level since 1990.

The drop in housing starts was the worst in the South, where they fell 11 percent in July. Starts fell 3.7 percent in the West and 1.3 percent in the Northeast, but they rose 2.6 percent in the Midwest.