The number of new homes being built in the US fell by 10.2% in September - worse than had been expected.
The US mortgage market is in disarray
And applications for building permits, seen as an indicator of future demand, also dropped sharply, down 7.2%.
Analysts say the Commerce Department report reflects ever-deepening troubles in the US housing market.
The data put the number of new homes constructed at a seasonally adjusted annual rate of 1.19 million units. Permit requests fell to 1.23 million.
House sales have been in decline since 2006 and the situation has been exacerbated as mortgage lenders react to rising defaults, as borrowers missed payments on loans that they were no longer able to afford.
This so-called sub-prime crisis has seen lenders tightening requirements for their home loans, so that fewer people qualify for mortgages.
Earlier this week, US Treasury Secretary Henry Paulson warned that the downturn in the housing market was likely to persist longer than had been expected.
It would "continue to adversely impact our economy, our capital markets and many homeowners for some time yet", he added.
The housing slowdown and decline in credit availability have triggered worries that the economy could go into a recession - a worry which was behind the Fed's move to cut interest rates from 5.25% to 4.75% last month.