(Adds Fed's Beige Book, updates markets)
* Industrial output up 0.7 percent in March
* Factories, mines, utilities all post gains
* Housing starts rise 2.8 percent in March
* Permits fall 2.4 percent, multi-family sector a drag
By Lucia Mutikani
WASHINGTON, April 16 (Reuters) - U.S. industrial production rose at a faster-than-expected clip in March, the latest sign the economy was gaining momentum.
Groundbreaking for new homes also increased but remained well below the post-recession peak hit in November, signaling the drag the housing market is placing on the economy.
"Several parts of the economy are warming up, but housing is the exception," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania. "We are still on track for very strong second-quarter growth."
Output at the nation's factories, mines and utilities rose 0.7 percent last month after an upwardly revised gain of 1.2 percent in February, the Federal Reserve said on Wednesday.
The increase in industrial production, which beat economists' expectations for a 0.5 percent gain, reflected in part a 0.5 percent rise in manufacturing output. There were also hefty increases in production at mines and utilities.
The report added to data such as retail sales and employment in painting a bullish picture of the economy at the end of the first quarter after it was slammed by an unusually cold and disruptive winter.
The weather's loosening grip on the economy was also highlighted by the Federal Reserve's anecdotal Beige Book on Wednesday. The U.S. central bank said reports from its contacts suggested economic activity increased in most regions of the country in recent weeks.
Forecasting firm Macroeconomic Advisers estimates the brutal weather sliced off 1.4 percentage points from first-quarter gross domestic product and its end will boost second-quarter growth by 1.6 percentage points.
Growth estimates for the first three months of this year range as low as a 0.6 percent annual rate, which would mark a sharp deceleration from the fourth-quarter's 2.6 percent pace.
While the rest of the economy is perking up, housing continues to struggle. A separate report from the Commerce Department showed housing starts failed to bounce back as strongly as expected from winter's doldrums.
Groundbreaking activity increased 2.8 percent in March to a seasonally adjusted annual rate of 946,000, well below economists' expectations for a 973,000-unit rate.
Compared to March last year, starts were down 5.9 percent, the biggest decline since April 2011.
Though the cold winter weighed on homebuilding in December and January, activity has also been hampered by shortages of building lots and skilled labor, as well as rising prices for materials.
"There have been growing signs that the rebound in the housing market we have seen the past several years might be petering out," said Anthony Karydakis, chief economic strategist at Miller Tabak in New York.
"We have been seeing this in other housing indicators. With the slowdown, housing will become a smaller contributor to overall growth going forward."
Stocks on Wall Street pushed higher as investors were heartened by data that showed stronger-than-expected economic growth in China, but an index tracking shares of homebuilders was little changed. Prices for U.S. Treasuries slipped and the dollar was steady against a basket of currencies.
The housing market is under strain from higher mortgage rates and elevated house prices that are sidelining potential buyers. A report on Tuesday showed homebuilders in April were still downbeat about the sector's near-term prospects.
But there is a ray of hope for a pick-up. In another report on Wednesday, the Mortgage Bankers Association said applications for loans to buy houses rose last week.
Applications for new home purchases increased 15 percent in March compared to February, which bodes well for home sales during that period. Mortgage applications are, however, well below where they were last year.
Groundbreaking for single-family homes, the largest segment of the market, surged 6.0 percent to a 635,000-unit pace last month. Despite rising for a second consecutive month, single-family starts are below November's 713,000-unit rate, which was the highest since March 2008.
Starts for the volatile multi-family homes segment fell 3.1 percent to a 311,000-unit rate, a five-month low. They were flat in February.
"These soft trends challenge our view there will be a solid bounce back in residential investment in the second quarter," said Daniel Silver, an economist at JPMorgan in New York.
Spending on residential construction fell in the fourth quarter, the first quarterly decline in three years. It is expected to have declined again in the first quarter.
Last month, permits to build homes fell 2.4 percent to a 990,000-unit pace, pointing to weaker starts in the months ahead. Permits for single-family homes rose 0.5 percent but fell 6.4 percent for the multi-family sector. (Reporting by Lucia Mutikani; Additional reporting by Richard Leong in New York and Elvina Nawaguna in Washington; Editing by Paul Simao and Andrea Ricci)