The Commerce Department reported that construction of new homes and apartments fell by 5.6 percent last month to a seasonally adjusted annual rate of 2.01 million units.
The decline was double what analysts had been expecting and indicated that rising mortgage rates are beginning to take a toll on housing, the economy's star performer in recent years.
In other economic news, the Labor Department said the number of Americans who have lost jobs due to hurricanes Katrina, Rita and Wilma rose by 19,000 last week to total 561,400. That increase was down slightly from the 21,000 hurricane-related claims that had been filed in the previous week.
Storm-related claims peaked at 108,000 in the third week in September and have been declining since that time.
Total jobless claims throughout the country fell by 25,000 last week to 303,000, the lowest level since mid-April and a sign that the labor market is shaking off the impact of the hurricanes.
Mortgage rates were climbing in October and last week hit a two-year high of 6.36 percent for the nationwide average on 30-year mortgages.
Analysts believe that rates will climb even higher in coming months as the Federal Reserve keeps tightening credit in an effort to make sure that this year's surge in energy prices does not spell broader problems.
The October decline in housing, the biggest since a 17.7 percent drop last March, showed a slowdown in both single-family and apartment construction. Single-family homes were being built at an annual rate of 1.68 million units last month, down 4.9 percent from the. Construction of multifamily units fell by an even larger 13.7 percent to an annual rate of 390,000 units.
In a sign of potential weakness in the future, the number of building permits issued in October dropped by 6.7 percent to an annual rate of 2.07 million units.
The weakness in construction activity was widespread across the country, led by a 10.8 percent drop in the West, where building activity fell to a seasonally adjusted annual rate of 511,000 units.
Construction activity was down 10.5 percent in the Midwest to an annual rate of 333,000 units while construction activity fell 7.5 percent in the Northeast to an annual rate of 172,000 units.
Home construction fell 0.5 percent in the South, down to an annual rate of 998,000 units in October. Government analysts said the hurricanes that hit Gulf Coast states did not have a significant impact on building activity in the region last month.
Private analysts believe that rebuilding from the storms will boost construction but that this positive effect will not be felt for several more months.