Tough conditions continued across the Australian construction industry in April, a report released Friday by the Australian Industry Group (Ai Group) said.

The Australian Industry Group Australian Performance of Construction Index (Australian PCI), in conjunction with the Housing Industry Association, fell 1.5 index points to 37.9 points in April, the lowest level in more than two years.

A reading below 50 points indicates a contraction in activity.

The last time construction activity expanded in Australia was in May, 2010.

"Weak levels of new work, strong competition to secure contracts and caution amongst investors contributed to the poor reading," the report said.

"This was reflected across the major sub-sectors with house building registering a drop of 2.3 points to 38.4. New orders and employment were down across construction in April."

Ai Group Director Peter Burn said the continued very weak conditions across the construction sector highlight the patchiness in broad sections of the Australian economy.

He said the weak construction sector will be vulnerable to any increases in interest rates.

"Ongoing business and household caution remains an impediment to sustained recovery both in the residential construction sectors and in commercial construction," Burn said in a statement.

"The outlook across the four sub-sectors remains poor with new orders continuing to fall in each sub-sector."

The new orders sub-index was down 1.6 points at 37.8 and the employment fell 0.3 to 38.8 points, the report showed.

Housing Industry Association (HIA) chief economist, Harley Dale, said the weakness in residential construction highlighted the need for interest rates to be kept on hold.

"The housing components of the Australian PCI support HIA's forecast for a substantial reduction in new home building activity in 2011, which would be a most unfortunate outcome given Australia 's acute shortage of housing stock," Dale said.