Groundbreaking on new U.S. homes rose in June to its fastest pace in over three years, lending a helping hand to an economy that has shown worrisome signs of cooling.

The Commerce Department said on Wednesday that housing starts rose 6.9 percent last month to a seasonally adjusted annual rate of 760,000 units. That was the highest rate since October 2008.

"Housing is clearly in recovery mode, although the sector is much less important than it used to be," said Jim O'Sullivan, an economist at High Frequency Economics in Valhalla, New York.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

The housing market, which began to collapse six years ago, has been a relative bright spot in the economy this year, although it remains hobbled by a glut of unsold homes.

But since it makes up a smaller share of the economy than before the 2007-2009 recession, it can provide only a limited lift to the broader recovery.

In a cautionary sign for the housing sector, new permits for building homes dropped 3.7 percent to a 755,000 unit pace.

The Commerce Department said groundbreaking for single-family homes — the largest portion of the market — rose 4.7 percent, while starts for the more volatile multi-family homes segment rose 12.8 percent.

ECONOMY COOLING

On Wednesday, the Mortgage Bankers Association said applications for U.S. home mortgages jumped last week on a surge in demand for refinancing as the interest rate on 30-year mortgages fell to a record low.

Other data in recent weeks has shown signed contracts for home purchases rose sharply in May and rising home prices.

"Housing continues to be the one sector of the U.S. economy that is outperforming expectations," said Michael Gapen an economist at Barclays in New York.

Housing starts in June were above the median forecast in a Reuters poll of a 745,000-unit rate, and readings for April and May were revised higher.

Still, the broader U.S. economy has looked much more wobbly of late, and if the recovery fails and the country tips back into recession, housing also would suffer.

U.S. stocks rose, lifted by a rebound in tech shares following Intel's results. Shares in homebuilders were mixed. U.S. 30-year bond yields fell as safe-haven demand for bonds persisted despite the housing data.

In testimony to a Senate panel on Tuesday, Federal Reserve Chairman Ben Bernanke said the U.S. economic recovery was being held back by anxiety over Europe's debt crisis and the path of U.S. fiscal policy. He repeated the message before a committee in the House of Representatives on Wednesday.

Bernanke has warned that planned belt tightening by the U.S. government in 2013 would likely send the country back into recession, and Treasury Secretary Timothy Geithner echoed those concerns on Wednesday, calling for reforms to boost growth and provide fiscal sustainability.

"What the economy needs right now is a very substantial, well designed program of support for economic growth," Geithner said at the CNBC Institutional Investor Delivering Alpha conference in New York.

In his two days of testimony, Bernanke offered few concrete clues about whether the U.S. central bank was moving closer to a fresh round of monetary stimulus. He told lawmakers on Tuesday that policymakers meeting later this month would be looking for signs of any stall in the recovery of the labor market.

The pace of hiring in the United States slowed sharply in the second quarter, as did growth in factory output. Retail sales have also flagged in recent months.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown