U.S. housing starts fell in May after a hefty increase the prior month, but a surge in permits for future construction to a near eight-year high pointed to underlying strength in housing.

The steadily firming housing market, marked by rising home prices and sales, is likely to be acknowledged by Federal Reserve officials, who were preparing to gather for a two-day policy meeting on Tuesday.

Policymakers have repeatedly singled out housing as one of the weak spots in the economy. The U.S. central bank is expected to raise interest rates later this year. It has kept its short-term lending rate near zero since December 2008.

Groundbreaking dropped 11.1 percent to a seasonally adjusted annual pace of 1.04 mullion units, the Commerce Department said on Tuesday. That partially reversed April's large gain. April starts were revised up to a 1.17 million-unit rate, the highest since November 2007.

Economists had forecast housing starts falling to a 1.10 million-unit pace last month after April's previously reported 1.14 million-unit rate.

Permits for future home building increased 11.8 percent to a 1.28 million-unit rate, the highest since August 2007. It was the second straight month of increase. Permits have been above a 1 million-unit pace since July.

The dollar extended gains against the euro. U.S. government debt prices were little moved.

Home building has regained ground lost during a harsh winter and there are signs activity will accelerate this year as tightening labor market conditions spur strong wage gains and encourage young adults to move from their parents' basements.

A survey on Monday showed confidence among builders vaulting to a nine-month high in June, with measures of both current sales and buyer traffic increasing solidly.

Economists anticipate that the housing market will strengthen enough to take up some of the slack from the struggling manufacturing sector and support economic growth.

Groundbreaking for single-family homes, which account for the largest share of the market, fell 5.4 percent to a 680,000 unit pace. Starts for the volatile multifamily segment tumbled 20.2 percent to a 356,000 unit rate.

Groundbreaking fell in all four regions, declining a steep 26.5 percent in the Northeast after April's spectacular gains. Starts in the South, where most of the home building takes place, fell 5.0 percent.

Single-family building permits increased 2.6 percent to their highest level since December. Multi-family building permits soared 24.9 percent.

Permits for buildings with five units or more increased to their highest level since January 1990. The multifamily sector is being driven by demand for rental accommodation as more people move away from homeownership.