U.S. housing starts plunged 7.8 percent in March, their biggest drop in two years, the government said on Tuesday, in a sign the housing sector is giving back some of the strong gains it made over the mild winter. 

Ground breaking for new homes dropped to a seasonally adjusted annual rate of 1.646 million units from an upwardly revised 1.785 million unit rate in February, the Commerce Department said. Starts on single-family homes -- the largest category of activity -- fell 11.4 percent, the biggest fall-off since January 1994, Commerce said. 

Analysts had forecast a decline, but not such a steep one. Market-watchers polled by Reuters had expected housing starts to fall to a rate of 1.686 million units. 

Building permits, an indicator of future activity, fell by 9.9 percent, the largest drop since February 1990. 

"The housing starts number was a surprise. Everyone has heard about how strong the market would be, but we had an unseasonably mild winter, which pulled some starts into January and February. That shows up in the March decline," said Mark Vitner, senior economist at Wachovia Securities in Charlotte, North Carolina. 

Starts fell by 12.9 percent in the South and by 6.2 percent in the West, the two biggest regions for home building. Ground breaking for new homes fell by 7.0 in the Midwest but rose 15.5 percent in the Northeast. 

The decline in housing starts is a soft signal for the U.S. economy, which most observers believe is emerging gradually from a slump that began in March 2001. Consumer prices rose in March, the government reported on Tuesday, but the increase was less than expected. 

Housing observers have long been wondering when the levels of building and buying would cool off the torrid levels of late last year and the early part of 2002. Many economists had cautioned the warm winter may have pushed housing activity to unsustainable levels.