* Housing starts drop 16 percent, biggest fall since 2011
* Permits fall 5.4 percent, largest drop in seven months
* PPI final demand up 0.2 percent, core PPI up 0.2 percent
WASHINGTON, Feb 19 (Reuters) - U.S. housing starts recorded their biggest drop in almost three years in January, likely weighed down by harsh weather, but the third month of declines in permits pointed to some underlying weakness in the housing market.
Other data on Wednesday showed little inflation pressures at the factory gate in January, even as prices for goods rose for a second straight month.
Groundbreaking tumbled 16.0 percent to a seasonally adjusted annual rate of 880,000 units, the lowest level since September, the Commerce Department said. The percentage drop was the largest since February 2011.
Starts for December were revised up to a 1.05 million-unit pace from the previously reported 999,000-unit rate.
Economists polled by Reuters had expected starts to fall to a 950,000-unit rate in January
Starts in the Midwest tumbled a record 67.7 percent, suggesting unseasonably cold weather could have disrupted activity. But at the same time groundbreaking in the Northeast surged to the highest since August 2008.
Frigid temperatures have been blamed for the sharp slowdown in hiring in December and January. They also chilled manufacturing output last month and have been cited for the unexpected drop in retail sales in January.
U.S. financial markets were little moved by the data.
In a separate report, the Labor Department said its seasonally adjusted producer price index for final demand rose 0.2 percent last month as the cost of goods increased. It was the largest increase since October.
Prices received by the nation's farms, factories and refineries had edged up 0.1 percent in December.
The renamed index has been broadened to include services and construction. It was previously known as PPI for finished goods.
The PPI for final demand excluding volatile food and energy costs rose also 0.2 percent after being flat the prior month.
But another gauge of core producer prices - final demand less foods, energy, and trade services - nudged up 0.1 percent after rising 0.3 percent in December.
Inflation continues to run very low because of labor market slack, which could see the Federal Reserve keeping its benchmark interest rate near zero for a while even as it dials back its monetary stimulus.
But not all of the weakness in the data can be attributed to the cold weather, amid evidence the economy was already losing momentum towards the end of the fourth quarter.
Economists expect fourth-quarter gross domestic product will be lowered to an annual pace of about 2.4 percent from 3.2 percent. The trade deficit in December was much larger than the government had assumed in its first GDP estimate.
On addition, revisions to November and December retail sales figures pointed to a much slower pace of consumer spending, while the accumulation of wholesale inventories in December was below the government's forecasts.
Groundbreaking for single-family homes, the largest segment of the market, fell 15.9 percent to a 573,000-unit pace in January. That was the lowest level since August 2012.
Starts for the volatile multi-family homes segment dropped 16.3 percent to a 307,000-unit rate.
Permits to build homes fell 5.4 percent in January, the largest drop in since June, to a 937,000-unit pace. Permits for single-family homes slipped 1.3 percent. Multifamily sector permits declined 12.1 percent.