Economists polled by Reuters had forecast groundbreaking activity rising to a rate of 1.26 million units last month from a previously reported rate of 1.22 million units in March. Homebuilding increased 0.7 percent on a year-on-year basis.

The weakness in residential construction will probably do little to change the view that economic activity picked up by early in the second quarter. Gross domestic product increased at a pedestrian 0.7 percent annualized rate in the first three months of 2017.

Demand for housing remains underpinned by a tightening labor market, characterized by an unemployment rate at a 10-year low of 4.4 percent. A survey on Monday showed homebuilders' confidence rose in May, with bullishness about current sales and those over the next six months.

The underlying strength in the housing market helped Home Depot Inc, the No. 1 U.S. home improvement chain, to report higher-than-expected quarterly profit and same-store sales on Tuesday.

Home Depot and smaller rival Lowe's Cos Inc have remained a bright spot in the retail sector as a firming economy and higher wages drive new home sales and a rise in the value of existing houses spurs remodeling activity.

Prices of U.S. Treasuries increased slightly after the data while the U.S. dollar fell against a basket of currencies. U.S. stock index futures were trading modestly higher.

Single-family homebuilding, which accounts for the largest share of the residential housing market, rose 0.4 percent to a pace of 835,000 units last month. That left the bulk of the 5.1 percent decline in March intact.

Single-family starts surged 19.4 percent in the Midwest and advanced 9.1 percent in the West. They fell 3.4 percent in the South and tumbled 29.2 percent in the Northeast to their lowest level since June 2015.

Homebuilders are failing to take advantage of a chronic shortage of properties for sale amid complaints about expensive building materials and shortages of lots and labor.

Some of the drop in starts could be weather-related - parts of the United States experienced snowstorms in March and heavy rains in April.

"So Mother Nature had a hand in this. Looking ahead, there is room for growth," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

Last month, starts for the volatile multi-family housing segment dropped 9.2 percent to a pace of 337,000 units. Multi- family starts have declined for four straight months, suggesting that rental increases have probably peaked.

Building permits fell 2.5 percent, driven by a 4.5 percent drop in the single-family segment. Multi-family permits rose 1.4 percent.

(Reporting by Lucia Mutikani; Editing by Paul Simao)