Sales of existing US homes fell 8% to 5.04 million in September, the biggest year-on-year decline for 16 years, said the National Association of Realtors.
The weakness in the US housing market shows no sign of improving
It is the latest sign of a downturn in the US housing market which economists fear could lead to a recession.
The fall was worse than market predictions of a decline to 5.25 million sales.
The average sales price also fell in September, dropping 4.2% from a year earlier to $211,700 (£103,000).
The downturn in the housing market - which was sparked by record loan defaults in the sub-prime mortgage sector - has already hurt the profits of some of America's leading banks.
These include Merrill Lynch which has just announced that it has written off $7.9bn of mortgage related debt.
Last week industrial machinery group Caterpillar warned that the housing market could very well cause the US economy to fall into a recession next year.
Analyst Matthew Strauss of RBC Capital Markets said the latest housing figures are disappointing.
"It increases the uncertainty regarding the US economic outlook and reinforces the view the Fed may have to cut rates at its meeting next week," he said.
Despite the ongoing weakness in the housing market, US retail sales have so far remained resilient.
The most recent figures from the Department of Commerce showed that shop sales rose 0.6% in September, a larger-than-expected gain.
And outside of the banking sector, many US firms have continued to report strong profit growth.
Computer giant Apple said earlier this week that its latest quarterly profits surged 67% in the three months to the end of September.