American builders began work in July on the fewest houses in 17 years and the economic outlook dimmed, indicating the real-estate slump is at the epicenter of the growth slowdown, economists said before reports this week.

Housing starts plunged 9.9% to an annual rate of 960,000, according to the median estimate in a Bloomberg News survey ahead of a Commerce Department report tomorrow. The Conference Board’s index of leading indicators probably fell 0.2% last month, a third consecutive drop.

Stricter lending rules, rising borrowing costs, falling property values, and record foreclosures may further depress home sales and cause builders to keep retrenching.

Housing, job losses, and the credit crisis are likely to weaken the economy for the rest of the year and into 2009.

“There’s no underlying support for the housing market,” an economist at Wachovia Corp. in Charlotte, North Carolina, Adam York, said. “The economy as a whole is in fairly poor shape.”

The leading indicators index, a measure of the economy’s likely path over the next three to six months, is due for release on August 21.

Commerce’s housing report may also show building permits, a sign of future construction and a component of the leading index, fell 15% last month, according to the Bloomberg survey.

A change in New York City’s building code that took effect July 1 caused housing starts and permits to unexpectedly surge in June as builders broke ground ahead of the new regulations.