Analysts said the data on Tuesday, which came as Federal Reserve policymakers met to assess the economy, further allayed fears that the recovery from the worst recession since the Great Depression was at risk.

It also strengthened the argument against the US central bank announcing any new monetary policy easing steps at the end of Tuesday's meeting.

"It suggests we have hit bottom (in housing)," said David Wyss, chief economist at Standard & Poor's in New York.

"The economic numbers in the last last six weeks have been a little bit more encouraging and unless (Fed policymakers) feel there is a significant major risk of a double-dip, I think they will try to keep their powder dry."

Housing starts rose 10.5 percent, the largest increase since November, to an annual rate of 598,000 units, the Commerce Department said. Financial markets had looked for a rise to just a 550,000-unit rate.

Construction was bolstered by a big jump in activity in the volatile multi-family segment, which increased by nearly a third to an annual rate of 160,000 units in August. Single-family starts increased 4.3 percent to a 438,000-unit pace, the highest since June.

While data for August - from private-sector jobs growth to retail sales - have eased fears of a double-dip recession, the economy remains fragile and many analysts believe the Fed will launch a fresh round of purchases of longer-term government debt at some point.

However, there is no consensus among Fed policymakers whether a further easing in monetary policy is needed and what threshold should be met before taking action.

The central bank already has cut overnight interest rates to near zero and pumped more than $1.7 trillion into the economy with purchases of Treasury and mortgage-related debt.

Although the recession ended in June last year, the unemployment rate is at a stubbornly high 9.6 percent and there is an oversupply of homes on the market.

Residential construction is showing tentative signs of improvement, after hitting a soft patch following the end of the popular homebuyer tax credit in April.

"It is reasonable to believe that the post-tax credit plunge in housing activity, both sales and construction, is over, but we do not expect to see a strong recovery any time soon," said Ian Shepherdson, chief US economist at High Frequency Economics in Valhalla, New York.