* 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
By Lucia Mutikani
WASHINGTON, April 23 (Reuters) - Sales of new U.S. single-family homes tumbled to their lowest level in eight months in March, dealing a setback to the housing market recovery.
The Commerce Department said on Wednesday sales dropped 14.5 percent to a seasonally adjusted annual rate of 384,000 units, declining for a second consecutive month.
Economists polled by Reuters had forecast new home sales at a 450,000-unit pace last month.
Compared to March last year, sales were down 13.3 percent, the largest year-on-year decline since April 2011.
U.S. Treasuries extended gains on the report. The S&P 500 Homebuilding Index dropped 1.65 percent following the data, and an index of smaller builders tumbled 3.3 percent.
The housing market has been slammed by an unusually cold and snowy winter, higher mortgage interest rates and a shortage of properties that is limiting options for potential buyers.
House prices, whose increases have outstripped wage gains, are also weighing on the sector.
New home sales are counted at the signing of contracts. Last month's surprise decline could still reflect some of the impact from the cold weather. Sales plunged in the Midwest and the South. They also fell in the West, but rose in the Northeast.
Data on Tuesday showing a mild decline in home resales last month had offered hope the housing market could be stabilizing.
In another report on Wednesday, the Mortgage Bankers Association said applications for loans to purchase homes fell last week.
While housing is struggling, other sectors of the economy such as manufacturing are regaining momentum as the weather improves.
In a separate report, financial data firm Markit said its preliminary or "flash" U.S. Manufacturing Purchasing Managers Index was little changed in April.
The survey's measure of output, however, hit its highest level since March 2011, while new orders increased.
"With manufacturing acting as a good bellwether of the rest of the economy, the survey bodes well for further robust economic growth in the second quarter," said Chris Williamson, chief economist at Markit.
Although new home sales are volatile month-on-month and account for less than 10 percent of the overall market, the drop last month offered confirmation that housing would again be a drag on gross domestic product in the first quarter.
The inventory of new houses on the market increased 3.2 percent to 193,000 units in March, the highest since November 2010. While the stock of new houses on the market has come off a record low hit in July 2012, it remains at less than half of its pre-recession level.
Builders have been complaining about a shortage of building lots and skilled labor, as well as high material costs.
March's weak sales pace pushed the months supply of houses on the market to 6.0, the highest level since October 2011. That was up from 5.0 months in February.
The median price of a new home last month rose to $290,000, up 12.6 percent from $257,500 in March of last year. (Reporting by Lucia Mutikani; Additional reporting by Rodrigo Campos in New York; Editing by Paul Simao)