Consumer spending rose moderately in May even as savings touched the highest level in eight months, suggesting a tepid economic recovery was still intact.

The data on Monday helped to allay fears that consumers, key to reviving the economy following the longest and deepest slump in 70 years, were retreating.

Consumers are spending at a reasonably solid pace, but are still conservative. With two months of the (second) quarter in hand, consumers are at roughly the same pace of spending growth as we saw in the first quarter, said Julia Coronado, an economist at BNP Paribas in New York.

Spending increased 0.2 percent after being flat in April, the Commerce Department said. That was a touch above market expectations for 0.1 percent. Adjusted for inflation, spending was up 0.3 percent.

Investors, however, continued to worry about the recovery's strength. A string of recent data, including a report showing retail sales had slumped in May, implied it was slackening.

U.S. stocks were trading marginally higher at midday, while Treasury debt prices rose broadly. The U.S. dollar was up against a basket of currencies as potential funding tensions in Europe weighed on the euro.

The government on Friday said consumer spending, which normally accounts for 70 percent of U.S. economic activity, rose at a 3 percent pace in the January-March quarter -- slower than the 3.5 percent it had estimated in May.

That contributed to the government's gauge of first-quarter growth being trimmed to an annual rate of 2.7 percent from 3 percent.

HIGH UNEMPLOYMENT

Spending is being hampered by stubbornly high unemployment, but analysts believe it will remain on a solid footing through the year as the labor market steadily improves.

Last month, an increase in jobs and longer working hours helped lift incomes. Incomes rose 0.4 percent after gaining 0.5 percent in April, the Commerce Department said.

Adjusted for inflation and taxes, income climbed 0.5 percent following a 0.6 percent increase the prior month.

The underlying recovery in employment, which we think continued in June, and hours worked is boosting households' finances, said Paul Dales, a U.S. economist at Capital Economics in Toronto.

Payrolls increased 431,000 in May, boosted by the hiring of 411,000 temporary workers to complete the 2010 census.

According to a Reuters survey, employment probably fell 110,000 this month as more than half of the census workers recruited in May were laid off.

But private hiring, considered a better gauge of labor market health, probably picked up after unexpectedly slowing in May. This should help to sustain spending and support the fragile economic recovery, analysts say.

With incomes outpacing spending, the saving rate rose to 4 percent last month from 3.8 percent in April. Savings increased to an annual rate of $454.3 billion, the highest level since September.

The report on spending showed inflation pressures remain muted. The personal consumption expenditures price index was flat for a second month in a row, while the core price index, which excludes food and energy costs, rose 0.2 percent.

The core price index, closely eyed by officials at the Federal Reserve, was up 1.3 percent in the 12 months to May. Most officials at the central bank would prefer to see it closer to 2 percent.

The Fed last week left overnight lending rates in a zero to 0.25 percent range and renewed its commitment to an ultra low interest rate policy, saying inflation was likely to be subdued for some time.

Separately, a measure of national economic activity slipped last month, but remained above levels historically linked to a mature economic recovery following a recession.

The Chicago Federal Reserve Bank said its national activity index fell to 0.21 from 0.25 in April. The three-month moving average indicated limited inflationary pressure over the coming year, the Chicago Fed said.

(Editing by Andrea Ricci)

BNP Paribas Inflation Unemployment