"There is no end in sight," said Kurt Karl, chief U.S. economist with Swiss Re in New York. "The builders didn't realize how many cancellations they are going to face. If we hit 1.0 million start range, it's consistent with recessions in the past. And we are heading in that direction."

The dour report pushed up prices for bonds and weighed on the dollar as traders saw greater likelihood the Federal Reserve would follow up a rate cut it made last month with another at its next meeting on Oct. 31.

A separate report, however, showed the economy facing inflation pressure from food and energy, which could complicate the Fed's thinking on borrowing costs.

Consumer Prices Rise

The Labor Department said the Consumer Price Index, the most broadly used gauge of inflation, rose 0.3 percent last month, the biggest gain in four months. However, the core rate, which excludes energy and food, moved up a modest 0.2 percent.

"The housing starts and consumer price inflation numbers highlight the tough dilemma the Federal Reserve faces," said Bernard Bauhmohl, managing director of the Economic Outlook

Group in Princeton Junction, New Jersey.