Consumer confidence plummeted to its lowest level in more than two years in early July and factory output stalled in June, further diminishing hopes of a quick economic rebound in the second half of the year.

The Thomson Reuters/University of Michigan's index of consumer sentiment slipped to 63.8 in July, the lowest since March 2009, as households worried about declining wages and rising unemployment, data showed on Friday, from 71.5 in June. Economists had expected the index to climb to 72.5.

Separate data from the Federal Reserve showed industrial output rose a modest 0.2 percent in June as manufacturing production stagnated partly due to supply disruptions in the auto sector related to the earthquake in Japan.

The reports were the latest in a series, including weak retail sales and employment, to suggest that the anticipated step-up in growth in the second half of the year might not be as strong has initially thought.

There's not a lot of confidence that growth is going to pick up. It's definitely not a good thing for the bigger picture, said Gennadiy Goldberg, fixed income analyst at 4CAST in New York.

Growth slowed sharply to a 1.9 percent annual rate in the first quarter after a brisk 3.1 percent expansion in the final three months of 2010. The economy is believed to have grown by between 1.5 percent and 2.0 percent in the second quarter.

Labor Department data showed the Consumer Price Index fell 0.2 percent in June, the largest drop since June 2010, after rising 0.2 percent in May.

But stripping out food and energy, core CPI rose 0.3 percent after a similar gain in May and above economists' expectations for a 0.2 percent increase.

STRONG CORE REBOUND

We are getting a very, very sharp rebound in core inflation and much more than the Fed had bargained for. We will be at price stability and possibly through it before the end of this year, said Eric Green, chief economist at TD Securities in New York.

Federal Reserve Chairman Ben Bernanke said this week the U.S. central bank was prepared to act if growth falters further, but made it clear that Fed is not at that point yet.

Bernanke noted inflation was higher than in late 2010, when the Fed got ready for its $600 billion government bond-buying program, which ended in June.

Last month, industrial production was lifted by a jump in utilities and mining output. However, manufacturing in the second quarter posted its weakest rise since the recession ended in mid-2009.

There are indications that manufacturing remained weak in July. The New York Federal Reserve's Empire State general business conditions index was at minus 3.76 this month from minus 7.79 in June, another report showed.

Overall inflation last month was pinned down by gasoline prices, which dropped 6.8 percent, the largest decline since December 2008, after falling 2 percent in May. Food prices rose a moderate 0.2 percent after increasing 0.4 percent in May.

But rising costs for housing, new vehicles, used trucks and apparel pushed up core inflation last month. Shelter costs rose 0.2 percent for a second straight month, while apparel prices jumped 1.4 percent, the largest increase since March 1990.

Prices for new vehicles increased 0.6 percent last month, slowing from May's 1.1 percent surge, likely reflecting an easing of auto shortages related to supply chain disruptions from Japan. Used cars and trucks jumped 1.6 percent, the largest increase since December 2009.

In the 12 months to April, core CPI rose 1.6 percent after increasing 1.5 percent in May. Fed officials, however, would like to see that closer to 2 percent.

Overall consumer prices were up 3.6 percent from a year earlier, after rising 3.6 percent in May.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)

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