Retail gasoline demand fell 12.5 percent last week as Americans took days off work after the Christmas holiday, reducing commutes on the last week of the year, MasterCard Advisors' SpendingPulse report showed on Tuesday.

Demand fell sharply from the previous week, but was off only 0.4 percent from the same week last year.

A major storm pummeled Northeastern United States and stranded many travelers also curbing gasoline consumption especially in the Central Atlantic region, where demand fell 14.5 percent, MasterCard said.

Average gasoline demand fell by 1.2 million barrels per day (bpd) to 8.4 million bpd in the week to December 31.

Over the latest four weeks, U.S. gasoline consumption was 0.5 percent lower year-over-year. (Graphic: http://link.reuters.com/dah62k )

Retail gasoline prices went up 6 cents to $3.06 a gallon, 16.8 percent higher than a year ago and the highest level seen since October 2008, according to MasterCard.

Data from the U.S. Department of Energy also shows the national average retail gasoline price hit its highest level since Oct 2008 at $3.124 a gallon in the week to January 3.

The average price is now approaching the $3.50 a gallon cut off point which destroyed demand in the summer of 2008, said John Gamel, director of economic analysis for MasterCard Advisors SpendingPulse.

Still there is room for prices to grow. The question is can the economy support such prices, Gamel added.

The rule of thumb is that short-term gasoline demand in the United States is inelastic. We can't come out with alternatives to replace gasoline because prices are high. But these prices will dampen economic activity. If people spend too much at the pump, they have little to spare for other purchases, said Antoine Halff, first vice-president of research at Newedge Group in New York.

In 2010, average retail gasoline demand was almost flat, showing only a 0.28 percent growth compared to where it was in 2009.

Demand was about 2 percent above 2009 levels over the summer but started seesawing toward fall. In any case, we are nowhere near pre-recession, 2007 levels, since economic conditions, and particularly employment, are weak, Gamel said.

MasterCard Advisors estimates retail gasoline demand based on aggregate sales activity in the MasterCard payments system coupled with estimates for all other payment forms including cash and checks. MasterCard Advisors is a unit of MasterCard Inc .

(Reporting by Selam Gebrekidan; Editing by David Gregorio)

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