The decline is larger than the 1.6 percent drop analysts expected and showed weakness in all the country except the West.
The data was bound to shake Wall Street, already rattled by a crisis in the financial system. Stock futures pointed to a lower opening.
The housing downturn has depressed overall economic activity and pushed the country close to a recession. Thousands of construction jobs have been lost, contributing to an economic slowdown that has pushed the overall unemployment rate to a five-year high of 6.1 percent in August.
There have been steep declines in home prices in much of the country. This has helped trigger record levels of mortgage defaults, dumping more homes on an already glutted market and further depressing prices. The billions of dollars of losses on mortgage investments have sent shockwaves through the country's financial sector, triggering the biggest restructuring on Wall Street since the Great Depression.
In the past 10 days, the government has seized control of the country's two biggest mortgage finance companies, Fannie Mae and Freddie Mac, and late Tuesday announced it was providing an $85 billion emergency loan to the country's largest insurance company, American International Group Inc. All three titans were brought low by soaring losses on mortgage investments.
For August, the 6.2 percent drop in housing construction reflected a 1.9 percent decline in single-family construction which fell to an annual rate of 630,000 units. Construction of multi-family units fell by 15.1 percent to an annual rate of 265,000 units.
Building activity was down in all parts of the country outside of the West. Construction fell by 14.5 percent in the Northeast and was down 13.6 percent in the Midwest and 7.4 percent in the South.
All the declines left construction activity 33.1 percent below the level of a year ago. Analysts believe that construction will continue falling for many more months as builders struggle to reduce the backlog of unsold new homes in a market that continues to slump.
Building permits, considered a good indicator of future activity, dropped 8.9 percent in August to an annual rate of 854,000 units.