WASHINGTON (Reuters) - Permits for U.S. homebuilding neared a 3-1/2 year high in February, even as groundbreaking activity slipped, suggesting a nascent recovery in the housing market was still on track.

New building permits surged 5.1 percent to a seasonally adjusted annual rate of 717,000 units last month, the Commerce Department said on Tuesday. It was the highest rate since October 2008 and far exceeded economists' expectations for an advance to a 690,000-unit pace from January's 682,000-unit rate.

Housing starts slipped 1.1 percent to a rate of 698,000 units. January's starts were revised up to a 706,000-unit pace from a previously reported 699,000 unit rate.

Economists polled by Reuters had forecast housing starts little changed at a 700,000-unit rate. Compared to February last year, residential construction was up 34.7 percent, the biggest year-on-year rise since April 2010.

" The data we see now indicates housing activity has stabilized and we could be in the early stages of improvement," said Gary Thayer, chief macro strategist at Wells Fargo Securities in St. Louis.

Green shoots are starting to emerge in the housing market, but an oversupply of unsold homes, which is depressing prices, remains a major hurdle, even as sales have picked up in recent months as job growth accelerated.