A rise in U.S. consumer confidence to its highest level in six months and a much bigger-than-expected contraction in the country's trade deficit pointed to a firmer economic recovery on Friday.

The boost in consumer confidence on the back of an improving jobs outlook was another indication consumers are willing to spend over the holidays while a rise in exports looks set to lift economic growth this quarter.

The data fits into a pattern of an economy that is gaining traction after a slowdown in the summer and is likely to intensify the debate over whether the Federal Reserve needs to keep stimulating the economy through asset purchases.

We are in the gradual recovery camp and are definitely on the upper side of that now, said Pierre Ellis, senior global economist at Decision Economics in New York. It adds to a growing number of economic indicators that are looking better-than-expected.

Consumer sentiment in December rose to its highest level since June and was at its third-highest since the start of 2008 according to a Thomson Reuters/University of Michigan survey. Government data showed U.S. exports in October rose a robust 3.2 percent while imports declined slightly.

U.S. stock indexes were marginally higher after the reports, hovering close to new recent highs. U.S. Treasury bond prices added to losses while the dollar gained.

The survey's preliminary December reading for consumer sentiment came in at 74.2, up from 71.6 in November. That was above the median forecast of 72.5 among economists polled by Reuters.

Consumers cited a more favorable jobs outlook, chiming with recent data pointing to some improvement in the labor market. But slow jobs growth and high unemployment is still one of the biggest impediments to the recovery.

Although the unemployment rate edged up to 9.8 percent in November, new claims for unemployment benefits fell more than expected last week and the four-week moving average slipped to a fresh two-year low.

Federal Reserve Chairman Ben Bernanke has hinted that the central bank may increase its $600 billion bond purchasing program if unemployment continues to stay high.

The sentiment survey's barometer of current economic conditions rose to its highest reading since January 2008, just after the economic downturn began. The index for December came in at 85.7, up from 82.1 in November and above a forecast of 83.1.

Meanwhile, the U.S. trade deficit for October totaled $38.7 billion, down from a revised estimate of $44.6 billion for September. Analysts surveyed before the report had expected the deficit to narrow just slightly to about $43.60 billion.

Record exports to China and Mexico in October helped push the overall export tally to $158.7 billion, the highest since August 2008. Exports to the European Union and Japan also grew.

Despite record exports to China in October, the U.S. trade deficit with that country in the first 10 months of 2010 was $226.8 billion, up 20.3 percent from the year-earlier period.

The sharp rise is likely to keep China's trade and currency policies on the minds of U.S. lawmakers in 2011.

The smaller-than-expected trade deficit could boost estimates for U.S. fourth-quarter economic growth because it implies a larger share of U.S. demand is being met by domestic production.

This suggests that the economy is accelerating, said Neil Dutta, an economist at Bank of America Merrill Lynch in New York, raising his forecast of fourth-quarter economic growth to about 3.0 percent.

On an annual basis, the trade deficit has widened sharply this year and could surpass $500 billion when final figures for 2010 are available. Last year, in the midst of the global financial crisis which put a squeeze on world trade, the U.S. trade gap narrowed about 46 percent to $374.9 billion.

(Editing by Andrea Ricci)

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