Should I sell my house at a loss if it means I have to take out a loan against my 401k and deplete my savings ?

Rent will NOT cover the mortgage on it. We'd be taking an $800 loss per month. We bought our townhome in 2005 for 370k. Our neighbor just sold his at a close price of 240. We currently owe 290k. The townhome is only 2 bedrooms on the upper level and is no longer sufficient for our needs- when we purchased in 2005 we had no children. In 2008 we had our first daughter and in Feb this year got a surprise set of twins so we had to move on. We just purchased a single family home, so now the question is whether to sell the TH at a loss or rent it. I know the conventional wisdom isnot to touch your 401k for this but I'm not sure whatwe gain by hanging on to it. I don't see prices rising enough in the next few years to help us any. We thought about a short sale but right now we don't have a hardship, although we might have to continually draw on our savings each month to make up the difference between rent and the mortgage, so we might end up exhausting our savings to hang on to the TH if we rent it anyway. We have about 35k in savings and about 40k available to us in a 401k in the form of a loan. I'd really appreciate answers from anyone with a financial planning background as to the best course of action. A loan on the 401k would be less out of pocket per month than the $800 to cover the rent.