WASHINGTON (Reuters) - Permits to build new U.S. homes unexpectedly surged in March to their highest level in more than 1-1/2 years, but a surprise dip in consumer confidence tempered optimism over the broadening economic recovery.

Housing Market

Building permits, which give a sense of future home construction, jumped 7.5 percent to a 685,000-unit pace last month, the Commerce Department said on Friday. Markets had expected a 630,000 unit-pace.

New home construction was the highest since November, although the bulk of the rise was in the volatile multifamily segment.

Separately, the Thomson Reuters/University of Michigan's Surveys of Consumers index of consumer sentiment slipped to a five-month low of 69.5 in early April from 73.6 at the end of March. That was below market expectations for 75.0.

Analysts said the drop in consumer confidence, a proxy for spending, was at odds with the rise in retail sales seen in recent months.

"The retail sales continue to show strength as well so these figures are quite surprising. The overall consumer sector is still improving. I'm inclined to think this is an outlier," said Jim O'Sullivan, chief economist at MF Global in New York.

U.S. stocks held losses after the sentiment data, while government bond prices extended gains.

A perception that the recovery is too slow likely contributed to the decline in sentiment early this month, according to the survey's sponsors.

"While consumers think the overall economy will continue to improve, they still hold quite negative views on their own income and job prospects," Richard Curtin, director of the surveys, said in a statement.

Even though consumers are gloomy about their economic prospects, that was not enough to prevent them from investing in new residential property last month.

House starts rose 1.6 percent to a higher than expected seasonally adjusted annual rate of 626,000 units. February's housing starts were revised up to show a 1.1 percent increase, which was previously reported as a 5.9 percent drop.

Markets had expected housing starts to rise to 610,000 units. The bulk of the increase in new home construction came from an 18.8 percent jump in starts for the volatile multifamily segment. Groundbreaking for single-family homes slipped 0.9 percent.

The data was a welcome change after the housing market recovery appeared to have stalled in recent months and sales dropped after strong gains in the second half of 2009.

The sector, a key factor behind the worst economic downturn since the Great Depression, remains one of the headwinds confronting the recovery.

A National Association of Home Builders survey on Thursday showed home-builder sentiment rose to a seven-month high in April as consumers rushed to take advantage of a home-buyer tax credit. Better economic conditions also helped.

New building permits increased across both segments of the housing market and were up 34.1 percent from March 2009, the biggest year-on-year gain since February 1992.

"The surge in single family permits that is the main leading indicator within the report, should be regarded as a very positive sign that the recovery is gaining some momentum even within the weakest sector of the economy," said Alan Ruskin, chief international strategist at RBS Securities in Stamford, Connecticut.

New home completions fell 3.1 percent to a record low 656,000 units. The inventory of total houses under construction dropped 1.4 percent to an all-time low of 489,000 units in March, while the total number of units authorized but not yet started soared 7.5 percent to 103,200 units -- the highest level since June.

(Reporting by Lucia Mutikani and Richard Leong; Editing by Andrea Ricci)