WASHINGTON (Reuters) - U.S. housing starts continued to fall in March, the government said on Tuesday, but the modest drop suggested the home building industry is still reasonably confident about prospects in the coming months.

The Commerce Department said ground breaking for new single-family homes, town homes and apartments fell 1.3 percent to a seasonally adjusted annual rate of 1.613 million units after posting a 2.2 percent fall in February. While starts remained fairly strong, they stood 1% percent below the level seen in March of last year.

Starts gained 4.0 percent in the Northeast and rose 6.9 percent in the West, the region with the most homebuilding activity. Starts fell 5.8 percent in the South and contracted 2.8 percent in the Midwest.

Although the overall economy continues to slow, declines in mortgage rates have helped to underpin the housing sector.

Nevertheless, the March drop in housing starts was larger than expected, as economists had predicted a decrease to an annual rate of 1.621 million units in a Reuters poll.

Building permits, a gauge of the sentimment among builders about the economy in the months ahead, also fell in March. Permits fell 3.6 percent in March to a seasonally adjusted annual rate of 1.615 million after posting a 2.8 percent fall in February.

Permits fell a sharp 24 percent in the Northeast, 4.0 percent in the Midwest and 1.2 percent in the South. In the West permits added 1.9 percent.