WASHINGTON (Reuters) - US housing starts increased more than expected in August to their highest level in four months and permits for future home construction rose, government data showed yesterday, suggesting the embattled housing market was starting to stabilize following the end of a tax credit.

The Commerce Department said housing starts rose 10.5 percent, the largest increase since November, to a seasonally adjusted annual rate of 598,000 units. July's residential construction was revised down to show a 0.4 percent gain, which was previously reported as a 1.7 percent increase.

Analysts polled by Reuters had expected housing starts to rise to a 550,000-unit rate. Compared to August last year, housing starts were up 2.2 percent.

New building permits rebounded 1.8 percent to a 569,000-unit pace last month after an unrevised 4.1 percent drop in July, lifted by a 9.8 percent rise in permits for multi-family units. Analysts had expected a 560,000-unit pace in August.

The housing market has hit a soft patch following the end of a popular homebuyer tax credit in April and a survey on Monday showed sentiment among home builders remained mired at an 18-month low in September.

A combination of high unemployment and an oversupply of homes are also weighing on the sector, which was the main catalyst of the worst recession since the Great Depression.

The downturn ended in June last year, but the economic recovery has since lost momentum, sparking fears in financial markets of a renewed recession.

Residential construction in August was lifted by a 32.2 percent jump in groundbreaking activity in the volatile multi-family segment to an annual rate of 160,000 units.

Single-family starts increased 4.3 percent to a 438,000-unit pace, the highest since June.

Home completions increased 5.6 percent to a 603,000-unit pace, also the highest since June. The inventory of total houses under construction was unchanged at 444,000 units last month, while the total number of units authorized but not yet started fell 3.1 percent to a record low 87,000 units.