WRAPUP 2-US October producer prices slump, home gloom grows

* October U.S. producer prices down record 2.8 percent

* Home builder sentiment falls to new low in November

* Sept foreign purchases of U.S. securities $143.4 billion

(Updates with home-builders data)

By Alister Bull

WASHINGTON, Nov 18 (Reuters) - U.S. producer prices posted a record decline in October as the weak economy sent energy prices tumbling, data on Tuesday showed, while business confidence among home-builders slumped.

A global credit crunch has depressed prices for commodities like oil and alarmed central banks that a general deflation in prices could ensue as advanced economies tip into recession.

A collapse in the U.S. housing market had chilled growth and sentiment among U.S. residential builders slumped in November to the lowest level since records began in 1985, as tight credit and mounting economic concerns took their toll.

Federal Reserve Chairman Ben Bernanke told U.S. lawmakers that credit markets had steadied a bit after hefty interest rate cuts and massive injections of liquidity, but remained under considerable strain.

Longer-dated U.S. government debt prices rose as investors bet on lower inflation after the Labor Department said the producer price index fell by 2.8 percent last month. Energy prices declined to a 22-year low.

"The headline number coming much lower than expected really underscores the disinflationary numbers coming in here. The good news is that it really gives the Fed a lot of flexibility to manage rates lower," said Craig Peckham, an equity trading strategist, at Jefferies & Co in New York.

The U.S. central bank has slashed interest rates 4.25 percentage points since September 2007 to 1 percent and is expected to trim its target benchmark overnight rate again before the end of the year.

Analysts polled by Reuters had forecast a 1.8 percent decline in the overall producer price index last month.

This measure of prices paid at the farm and factory gate has increased 5.2 percent over the last year, a slowdown from the 8.7 percent annualized growth notched in September.

Core producer prices excluding food and energy costs rose by 0.4 percent in October, compared with expectations for a 0.1 percent increase, and were up 4.4 percent over the last 12 months -- the steepest increase since 1989.

Higher core producer prices potentially cloud the outlook for lower inflation but analysts were pretty confident that the gloomy economy would squeeze inflation hard.