The consumer is coming under growing pressure from the relentless slide in equity prices, weak labour market conditions and the uneasiness over possible war with Iraq

Anthony Karydakis, Banc One Capital Markets

Retail sales fell 1.2% in September, their largest drop in 10 months and twice as bad as most analysts had expected.

At the same time, consumer sentiment in early October fell to its lowest level in nine years, according to the latest regular survey from the University of Michigan.

Consumer spending accounts for two-thirds of economic activity in the US and the fall poses a threat to the struggling economy.

Analysts blamed the fall on the uncertainty caused by President George W Bush's threats of war against Iraq, the unstable stock markets and a weak job market.

Uncertainty grows

September's weakness was due largely to a 4.8% fall in car sales, in spite of free-financing offers from manufacturers.

Excluding car sales, retail sales edged up by 0.1% percent in September.

Shoppers also cut spending on furniture, clothing, electronic equipment and appliances, and they ate out less.

The few bright spots included stronger sales for health and cosmetics, books and music, sporting goods, and building and gardening supplies.

Lack of confidence

As for consumer confidence, the University of Michigan's preliminary October sentiment index fell sharply to 80.4 from 86.1 in September.

The drop was far bigger than analysts had expected and brings the index down to the sort of levels it hit during the last major recession in the early 1990s.

Analysts said the news made it more likely that US interest rates, already extremely low, could be cut again.

"The consumer is coming under growing pressure from the relentless slide in equity prices, weak labour market conditions and the uneasiness over possible war with Iraq," said Anthony Karydakis, economist at Banc One Capital Markets.

"This is a potentially disturbing trend which increases the pressure on the Fed."