U.S. housing starts fell more than expected in August, but a rebound in building permits pointed to sustained strength in the housing market, which should support economic growth.

Groundbreaking dropped 3.0 percent to a seasonally adjusted annual pace of 1.13 million-units, the Commerce Department said on Thursday. July's starts were revised down to a 1.16 million-unit rate from the previously reported 1.21 million-unit pace.

Despite the fall, which reflected declines in groundbreaking on single and multifamily projects, starts remained above a one million-unit pace for the fifth straight month. Economists polled by Reuters had forecast groundbreaking on new homes falling to a 1.17 million-unit pace last month.

Building permits increased 3.5 percent last month to a 1.17 million-unit pace, after declining 15.5 percent in July.

A tightening labor market has unleashed pent-up demand for housing, especially among young adults. A report on Wednesday showed confidence among homebuilders advancing to a near-decade high in September.

The strengthening housing market, also marked by rising home sales and higher prices, is another segment of the economy that is supportive of an interest rate hike by the Federal Reserve. But the case for higher borrowing costs has been undermined by recent global financial markets turmoil.

The U.S. central bank's policy-setting committee resumes a two-day meeting on Thursday and is scheduled to announce its decision on interest rates at 2 p.m. (1800 GMT). The decision whether to raise the Fed's short-term interest rate from near zero is seen as a close call.

In August, groundbreaking for single-family homes, which accounts for the largest share of the market, fell 3.0 percent to a 739,000 unit pace. Single-family home building in the South, where most of the home construction takes place, rose 9.2 percent to the highest level since December 2007.

Starts for the volatile multifamily segment fell 3.0 percent to a 387,000 unit rate. Single-family building permits rose 2.8 percent in August to their highest level since January 2008. Multi-family building permits rose 4.7 percent.