WRAPUP 2-U.S. August housing starts at 17-1/2-year low

* Housing starts, permits hit lowest rate since 1991

* Starts for single-family homes lowest since 1991

* U.S. current account deficit rises to 5.1 pct of GDP (Adds analysis, details)

By Glenn Somerville

WASHINGTON, Sept 17 (Reuters) - Construction starts on new U.S. homes plunged to a 17-1/2-year low during August as builders scaled back sharply to try to cope with the worst slump in U.S. housing since the Great Depression.

The Commerce Department reported on Wednesday that starts on new homes dropped 6.2 percent to a seasonally adjusted annual rate of 895,000, their lowest since January 1991 and well below the 950,000 rate that Wall Street economists surveyed by Reuters had anticipated.

In a further sign of the severe strain the economy faces, the department also said the deficit on the broadest measure of U.S. trade with the rest of the world widened to $183.1 billion in the second quarter from $175.6 billion in the first three months his year.

The U.S. shortfall on trade in goods with other countries grew and imports of oil were up, the department said.

The data on new-home starts was bleak, reflecting a battered housing sector that Treasury Secretary Henry Paulson has described as posing the single greatest threat to the overall economy.

Some analysts said fewer starts were a step toward ensuring a housing correction occurs.

BUILDERS PULL BACK

"Builders are continuing drastically to cut the flow of new inventory to the market, the essential precondition for stability," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

The August rate of starts on single-family homes -- a closely watched barometer that is more closely tied to average consumers' behavior -- fell 1.9 percent to 630,000, which also was the softest rate since the start of 1991.

Starts in August were a whopping 33 percent below the level a year earlier.

Roger Kubarych, chief economist at Unicredit Global Research in New York, said the data showed that house prices will keep declining for some time before markets stabilize but even that may be difficult if banks become reluctant to make loans.

"No one can doubt that a credit crunch is materializing with significant force that completely invalidates the notion that the housing slump is 'bottoming'" Kubarych said. "That proposition is entirely premature."