Surging energy prices helped cause unexpected drops in U.S. retail sales in June and consumer sentiment in July, reports on Friday showed, raising the prospects the Federal Reserve may be close to halting its campaign of hiking interest rates.

The University of Michigan's preliminary reading on consumer sentiment in July was 83.0, down from June's final 84.9 reading, said sources who saw the subscription-only report. The median forecast of Wall Street economists polled by Reuters was for a reading of 85.5.

This data, coupled with news from the Commerce Department that June retail sales fell 0.1 percent - the first decline since February - raised concerns of a economic slowdown.

Economists had forecast retail sales to rise 0.4 percent. Consumer spending accounts for about two-thirds of U.S. economic activity, but in recent years confidence measures have been a weak guide to actual spending.

Given the news of late and with what oil prices have been doing you might have expected it to be worse and there might be some relief it isn't. Expectations might be even weaker in the next report, said Jim Paulsen, chief investment strategist, Wells Capital Management, Minneapolis.

It supports the ongoing trend for the Fed of one and done or a pause.

The Fed has raised rates in 17 consecutive quarter-percentage-point steps to 5.25 percent and has left the door open as to its moves in the months ahead, depending on the outlook for growth and inflation.

The University of Michigan survey's index of current conditions slipped to 100.8 in July from 105.0 in June, while consumer expectations declined to 71.6 from 72.0 in June.

Consumers' expectations in July were for more muted inflation ahead, the report said, according to the sources.

The University of Michigan's preliminary July reading on one-year U.S. inflation expectations was 3.1 percent, down from 3.3 percent in June.

Median expectations for inflation over a five-year horizon edged down to 2.8 percent in July from 2.9 percent in June.

Treasuries trimmed earlier price losses, with the benchmark 10-year note trading unchanged in price from late Thursday for a yield of 5.07 percent.

The dollar popped up to session highs despite the softer-than-expected confidence data. U.S. stocks extended their losses.

ECONOMIC SLOWDOWN ON THE CARDS?

This number kind of justifies why the market's condition is so weak. The economic slowdown that is looked for in the second half of the year is well on its way to being a reality, said Barry Hyman, equity market strategist, EKN Financial Services Inc., New York.

The Commerce Department said sales at gasoline stations climbed 1.1 percent following a 1.9 percent gain in May, as rising oil prices continued to inflate prices at the pump. Gas station sales were up 20.4 percent from June 2005. When gas sales were stripped away, retail sales fell 0.2 percent.

Retail sales excluding motor vehicles and parts advanced 0.3 percent compared with an upwardly revised 0.7 percent increase in May, previously reported as a 0.5 percent gain. Analysts had forecast an increase of 0.4 percent in June.

Sales of motor vehicles and parts dropped 1.4 percent and when cars, parts and gasoline were excluded, retail sales edged up by 0.1 percent.

Consumer spending accounts for about two-thirds of U.S. economic activity and analysts worry that higher energy prices, which act as a tax on household budgets, could crimp spending.

Weakening retail sales might also persuade the Fed that growth was slowing enough to keep inflationary pressures in check.

This number is probably consistent with what the Federal Reserve forecast - moderate growth in the second half. The focus now will shift to June inflation releases, said Lynn Reaser, chief economist at Bank of America Investment Strategies Group in Boston.

The Fed has raised rates in 17 consecutive quarter percentage point steps to 5.25 percent and has left the door open to either halting or keeping going in the months ahead, depending on the outlook for growth and inflation.

It got more goods news on the inflation front on Friday after Labor Department data showed that import prices rose just 0.1 percent last month, below expectations, as petroleum costs slipped for the first time in fourth months.

Excluding a 1.4 percent drop in the cost of petroleum imports, import prices rose 0.4 percent, partly reflecting a big jump in metals prices, the Labor Department said.

However, U.S. crude oil futures jumped record highs on Friday, with the December contract at over $80 a barrel on Friday on escalating violence in the Middle East.

While June's 0.1 percent gain in overall import prices came in below the 0.3 percent advance Wall Street economists had expected.

(Additional reporting by Tim Ahmann in Washington and John Parry in New York)

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