WASHINGTON, May 16 (Reuters) - U.S. housing starts fell an unexpectedly sharp 6.8 percent in April, largely due to a drop in groundbreaking for multifamily homes, the government said on Friday.

But permits, an indicator of builder confidence in future sales, rose 1.2 percent last month, partially reversing a decline seen in March, the Commerce Department said.

The Commerce Department said groundbreaking for new homes slid to a seasonally adjusted 1.630 million unit annual rate -- their lowest level since April of last year -- from a downwardly revised 1.748 million clip in March. Starts fell well short of the expectations of analysts polled by Reuters, who had forecast a slip to a 1.736 million pace.

"The brisk pace for housing is hard to sustain, given that we lost about half a million jobs over the past several months," said Kurt Karl, chief economist for Swiss Re.

Starts of structures with five or more units fell 22.5 percent to a 244,000 annual rate, the lowest level since January 1997.

Single family starts fell 3 percent to a 1.356 million clip. But economists said there was strength in the housing market.

"Housing starts are very misleading because single family starts and permits are still showing underlying strength. The weakness was in multifamily starts, which has a small sample and tends to jump around," said Joseph Lavorgna, an economist with Deutsche Bank.

Permits climbed to a seasonally adjusted annual 1.708 million pace from an upwardly revised 1.688 million rate the month before.

Home buying and building has forged ahead despite the struggling U.S. economy as mortgage interest rates have dipped to lows not seen since the early 1960s.