U.S. consumer confidence rose in January to its highest level in eight months, underscoring the brightening economic outlook, although declining housing prices still cast a cloud on the recovery.

The Conference Board, an industry group, said on Tuesday its index of consumer sentiment jumped to 60.6 from 53.3 in December. The rise topped economists' expectations for a reading of 54.3 and reflected gains in stock market prices and some labor market strength, which offset sustained drops in home values and high gasoline costs.

The report was in sync with other data pointing to an acceleration in the pace of economic activity.

The recovery in stock prices and the beginnings of an improvement in the labor market are making people feel better about the economy, said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

Sentiment remained optimistic even though the closely watched Standard & Poor's/Case-Shiller survey also released on Tuesday showed that single-family home prices fell for a fifth straight month in November.

Though economists worry a sustained decline in house prices could impact consumer sentiment, they are optimistic it would be offset by the improving labor market conditions.

Shares prices rallied in the aftermath of a $858 billion tax deal struck by President Barack Obama and Republican lawmakers in December, which economists said would help put the economy on an upward growth trajectory.

The report on consumer confidence came as Federal Reserve officials gathered for a two-day meeting at which they are expected to acknowledge the improving outlook, but will likely suggest their $600 billion bond-buying program designed to stimulate growth is fully on track.

The government is expected to report on Friday that the economy grew at a solid 3.5 percent annual rate in the fourth quarter of last year, driven mainly by robust consumer spending, after expanding at a 2.6 percent pace in the July-September period.

The upbeat confidence report helped to curb losses on Wall Street, where shares fell on mixed corporate earnings. The dollar pushed from a two-month low against the euro, while prices for U.S. government debt rose.

HOUSING LAGS RECOVERY

But even as some sectors of the economy are showing a bit of strength, the S&P/Case-Shiller survey on the housing industry showed the housing market still struggling.

The S&P/Case-Shiller composite index of 20 metropolitan areas declined 0.5 percent from October, and sponsors said values may drop further. The decline in November was not as sharp as the 0.8 percent fall expected by economists.

From November 2009, prices were down 1.6 percent. Despite a slight improvement in sales of previously owned homes last month, economists said prices would likely continue to slide given the number of unsold homes on the market.

Given a pipeline of distressed properties that is at least two years of supply, the downward pressure on prices will be with us through 2011, even if we see some improvement in housing demand, said Yelena Shulyatyeva, an economist at BNP Paribas in New York.

Sixteen of the 20 cities surveyed showed annual price falls in November, while 19 showed monthly drops.

There is optimism, however, that the improving labor market will offset the declining housing prices.

Although there are still headwinds to overcome, we expect that solid job growth this year should help to push confidence higher in the coming months, said Omair Sharif, an economist at RBS in Stamford, Connecticut.

The Conference Board's expectations index climbed to its highest level since May, while the present situation index hit its highest level since November 2008.

Even more encouraging, consumers' labor market assessment improved, with the jobs hard to get index declining.

But the consumer survey also had some worrying news. Consumers' expectations for inflation in the next 12 months rose to the highest since July 2009.

(Additional reporting by Wanfeng Zhou in New York and Corbett Daly in Washington; Editing by Leslie Adler)

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