The U.S. housing downturn continues to worsen, with construction of new homes and apartments falling in August to the lowest level in 17 years, the U.S. Commerce Department reported Wednesday.

Housing construction dropped 6.2 per cent to a seasonally adjusted annual rate of 895,000 units. The size of the drop surprised analysts, who had forecast a decline of just 1.6 per cent.

The August figures represent the slowest building pace since January 1991, when housing was also going through a painful correction.

It comes as more bad news for Wall Street, already shaken this week by the bankruptcy of investment banker Lehman Brothers, the sale of Merrill Lynch and the U.S. Federal Reserve's rescue of American International Group, the world's largest insurer.

The housing downturn has depressed overall economic activity and pushed the U.S. close to a recession. Thousands of construction jobs have been lost, helping push the overall unemployment rate to a five-year high of 6.1 per cent.

The August decline was felt most in multi-family housing, where construction dropped by 15.1 per cent to an annual rate of 265,000 units. Building of single family homes declined 1.9 per cent to 630,000 units.

Building permits, which are considered a good indicator of future activity, dropped 8.9 per cent in August to an annual rate of 854,000 units.