By Lucia Mutikani

WASHINGTON (Reuters) - U.S. housing starts rose more than expected in June as construction activity increased broadly, but downward revisions to the prior months' data pointed to a sector treading water in the second quarter.

Groundbreaking surged 4.8 percent to a seasonally adjusted annual pace of 1.19 million units, the Commerce Department said on Tuesday. Starts for April and May were revised lower, taking some shine off the report. Building permits increased 1.5 percent to a 1.15 million-unit rate last month.

"Builders are building. But we have seemingly hit a lull and permit requests and construction activity are no longer accelerating sharply," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. 

Economists had forecast housing starts rising to a 1.17 million-unit pace in June. Groundbreaking in the second quarter was a touch higher than the average for the first three months of the year, suggesting residential construction was probably a mild boost to gross domestic product in the second quarter.

Still, the report added to data on employment, industrial production and retail sales in suggesting the economy gained speed in the second quarter after growth sputtered early in the year.

The Atlanta Federal Reserve left its second-quarter GDP growth forecast at a 2.4 percent annualized rate after the housing starts report. The economy grew at a 1.1 percent pace in the January-March period.

The S&P 500 homebuilding index <.SPLRCHOME> dropped 0.31 percent in line with a broadly weaker U.S. stock market. Shares in D.R. Horton Inc <DHI.N>, the nation's largest homebuilder, fell 0.44 percent and Lennar Corp <LEN.N> slipped 0.22 percent.

The dollar <.DXY> rose to a four-month high against a basket of currencies and U.S. Treasuries were trading higher.

LABOR, LAND SHORTAGES

The housing market is being supported by a strengthening labor market and demand for rental accommodation, but homebuilding is being constrained by labor and land shortages.

A survey of homebuilders published on Monday showed scattered softness in some markets, with builders citing regulatory challenges as well as shortages of lots and labor.

Groundbreaking on single-family homes, the largest segment of the market, surged 4.4 percent to a 778,000-unit pace in June. Single-family starts rose in all four regions, jumping by 31.6 percent in the Northeast and 7.3 percent in the Midwest.

But with permits for the construction of single-family homes increasing 1.0 percent last month to a 738,000-unit rate, single-family homebuilding could slow in the near term.

"Demand for new homes remains well-supported by record-low mortgage rates. The approval process might need to speed up to prevent construction delays," said Sal Guatieri a senior economist at BMO Capital Markets in Toronto.

Housing starts for the volatile multi-family segment rose 5.4 percent to a 411,000-unit pace. The multi-family segment of the market continues to be supported by strong demand for rental accommodation as some Americans remain wary of homeownership in the aftermath of the housing market collapse.

But economists see limited scope for further increases, saying that much of the demand was being fulfilled. Rent increases for apartments have started to moderate in some cities and vacancy rates are edging up. 

"There is still a lot of supply under construction, as industry reports are showing rental vacancy rates coming off the lows and rent gains slowing. More of the surge in multi-family starts last year is coming on line now," said Ted Wieseman, an economist at Morgan Stanley in New York.

Permits for the construction of multi-family building permits advanced 2.5 percent last month to a 415,000-unit pace.

(Reporting by Lucia Mutikani; Editing by Paul Simao)