* New home sales drop 14.5 percent in March
* New housing stock up 3.2 percent, median price at record high
* Factories expand in April, new orders push higher
WASHINGTON, April 23 (Reuters) - Sales of new U.S. single-family homes tumbled to their lowest level in eight months in March, dashing hopes for a quick turnaround for a sector that fell into a soft patch last summer.
The Commerce Department said on Wednesday sales dropped 14.5 percent to a seasonally adjusted annual rate of 384,000 units. It was the second consecutive monthly decline and the biggest since July, which was also the last time sales were so slow.
Sales were down 13.3 percent from a year ago, marking the largest year-on-year decline since April 2011.
Economists, who had expected sales to increase, said the drop suggested some fundamental weakness in the market, although unusually cold weather had also dampened activity.
"The weak tone of this report is a bitter pill for those, including ourselves, who have been looking for signs of a spring thaw in the housing recovery," said Millan Mulraine, deputy chief economist at TD Securities in New York.
U.S. housing stocks took a beating on the dour report, with the S&P 500 Homebuilding Index dropping more than 1.5 percent. An index of smaller builders tumbled more than 4.5 percent. Luxury home builder Toll Brothers fell 1.8 percent and DR Horton, the largest U.S. homebuilder, dropped 2.5 percent.
Broad stock indexes, in contrast, were little changed.
The housing market was slammed by the unusually cold and snowy winter, but higher mortgage rates, a run-up in prices and a shortage of properties that limited options for buyers have also cut into activity.
New home sales last month dived in the Midwest and the South, where unusually cold weather lingered early in the month. They also fell in the West. While sales in the Northeast rose, they failed to recoup even half of the prior month's 33.3-percent plunge.
"The rise in interest rates and prices of new homes is leaving some potential buyers with sticker shock," said Bill Banfield, vice president at mortgage lender Quicken in Detroit.
Data on Tuesday showing a mild decline in home resales in March had offered hope the housing market was stabilizing.
But the new home sales data and another report on Wednesday showing a drop in mortgage applications both suggested it would probably be a while before housing found its footing.
The sector's weakness could help convince the Federal Reserve to keep benchmark interest rates near zero long after it ends a bond-buying stimulus program later this year.
Even so, it is unlikely to derail the economy given that other sectors, such as manufacturing, are regaining momentum.
Financial data firm Markit said its preliminary manufacturing purchasing managers index was little changed in April. The survey's measure of output, however, hit its highest level since March 2011, with new orders increasing.
"This improvement is broadly consistent with our view that manufacturing production is going to pick up in the second quarter following a soft first quarter," said Daniel Silver, an economist at JPMorgan in New York.
Though new home sales are volatile month-on-month and account for less than 10 percent of the overall market, the drop in March confirmed that housing would again be a drag on gross domestic product in the first quarter. In the fourth quarter, it subtracted from GDP for the first time in three years.
Last month, the inventory of new houses on the market increased 3.2 percent to the highest level since November 2010.
While the stock is up from a record low hit in July 2012, it is not even halfway back to its pre-recession level.
March's weak sales pace pushed the months' supply of houses on the market to 6.0, the highest level since October 2011, from 5.0 months in February.
Nevertheless, the median price of a new home last month rose 12.6 percent from March last year to a record $290,000, a reflection of the still-lean inventories.
(Reporting by Lucia Mutikani; Additional reporting by Rodrigo Campos in New York; Editing by Paul Simao and Tim Ahmann)