Growth in retail sales stalled in August after a pitched battle over spending in Congress undermined faith Washington could steer the country clear of a double-dip recession, data showed on Wednesday.

Sales were unchanged from a month earlier, a Commerce Department report showed. It was a weaker reading than expected while sales growth during July was revised downward.

A separate report from the Labor Department showed U.S. producer prices were unchanged in August, held down by a drop in energy goods costs.

Consumer confidence plunged in August after a bruising battle over the U.S. budget slammed stock prices and pushed the nation to the brink of default.

The consumer reacted to the debt ceiling, the downgrade and the equity market swoon by basically hunkering down and not spending, said Tom Porcelli, senior U.S. economist at RBC Capital Markets in New York.

Consumer spending accounts for about two thirds of U.S. economic activity, and the data suggests growth in the first two months of the third quarter was weaker than many economists expected.

S&P 500 index futures pared gains on the retail sales data, while Treasury prices erased some losses.

Economists see a substantial chance the United States could reenter recession and many economists expect the Fed will unveil new measures to boost growth following its Sept 20-21 policy review.

The U.S. Congress let a debate over spending go down to the wire early last month, nearly leaving the government unable to pay its bills. The country's debt was then downgraded by a major rating agency.

President Barack Obama is currently lobbying Congress to approve a stimulus plan delivered to lawmakers on Monday.

The producer price report sends the Fed mixed signals about price pressures, with energy costs abating but core prices showing some pass-through of recent surges in energy and food costs.

Economic growth slowed sharply during the first half of the year, and the economy is vulnerable to potential shocks like an escalation of Europe's debt crisis.

(The data) shows the slowdown in the economy is real, said Steven Ricchiuto, chief economist at Mizuho Securities in New York.

On Wednesday, Moody's cut the credit ratings of two French banks because of their exposure to debt from troubled Greece, while the European Commission signaled it would soon present options on how the euro zone might issue bonds jointly -- a measure that would be aimed at propping up the zone's weaker members.

In the retail sales report, an increase in sales of electronics, gasoline and food was balanced with drops in purchases of cars, furniture and clothes. Spending at restaurants and bars also dipped.

Stripping out sales of gasoline, autos and building materials, so-called core retail sales rose 0.1 percent in August, pointing to some resilience. Excluding just autos, sales also were up 0.1 percent.

(Additional reporting by Mark Felsenthal in Washington and Richard Leong and Emily Flitter in New York; Editing by Andrea Ricci)

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