Consumer sentiment softened slightly in late July from earlier in the month, but optimism about job and income prospects kept it at its highest reading since February, a survey showed on Friday.

The Reuters/University of Michigan Surveys of Consumers said its final July reading on consumer sentiment was 90.4, a touch below the median forecast of 91.2 and the preliminary July reading of 92.4, which was a six-month high.

But it bounced back from June's final reading of 85.3, a 10-month low, and posted the index's best showing since February, when it stood at 91.3.

July's month-on-month gain was tied to consumers' favorable outlook about the economy, particularly regarding future employment and income prospects, the Reuters/University of Michigan Survey of Consumers said in a statement.

Just 19 percent of all consumers expected the economy to worsen in the year ahead, and nearly half of all consumers expected favorable conditions in the economy to persist to at least mid-2008, Reuters/University of Michigan Survey of Consumers said.

But survey organizers also noted that a deepening housing slump and payment problems in the subprime mortgage market, where borrowers with poor credit take out loans at high interest rates, mean the risks to consumers' sunny outlook are unusually large.

Indeed, optimism among lower-income households was not as great as that among those with higher incomes, with mortgage delinquencies and high gasoline prices depressing sentiment.

Moreover, the (housing) fallout has just begun, Reuters/University of Michigan Survey of Consumers said, with mortgage rate resets expected to mount during late 2007 and early 2008.

The survey's gauge of current consumer conditions stood at 104.5 in late July, below the preliminary reading of 105.7 but above a final June reading of 101.9.

The final July figure on consumer expectations was 81.5, below mid-July's 83.9 but above the June reading of 74.7.

The survey's one-year inflation index finished at 3.4 percent in July, unchanged from late June. The five-year inflation index rose to 3.1 percent from 2.9 percent at the end of June.

Consumer sentiment has been seen as a proxy on future consumer spending, which accounts for two-thirds of the U.S. economy.

Inflation