Construction of new homes in the U.S. fell during December but building permits rose surprisingly, indicating the continued weakness in the housing industry, the Commerce Department said on Wednesday.

Housing starts fell 4.3 percent to a seasonally adjusted annual rate of 529,000 units in December 2010, reaching the lowest level since October 2009.

Markets had expected the housing starts to rise to 550,000 units in the last month of 2010.

The drop in the new home construction was largely led by a 9 percent decline in single-family housing starts in December compared with the previous month.

However, new building permits, a measure of future construction, rose sharply by 16.7 percent to 635,000 units.

Analysts had expected permits to rise to 560,000 units for the month.

Building permits for single-family homes rose 5.5 percent to 440,000 in December month-on-month.

Homebuilders remain cautious about the housing market in the U.S as the unemployment rate continues to remain around 9.4 percent.

Unemployment is closely linked to consumer confidence and people's ability to spend, which currently remains weak, even if better than last year.