Retail sales fell in May for the first time in 11 months as receipts at auto dealers dropped sharply and other spending softened, suggesting economic activity continues to slow.

Retail sales slipped 0.2 percent, the Commerce Department said on Tuesday, after a 0.3 percent rise in April. Economists had expected retail sales to fall 0.4 percent.

The economy started the year on a soft note beset by bad weather and rising oil prices. A raft of surprisingly weak data recently has shown the lull in activity extending well into the second quarter, with the slowdown exacerbated by supply chain disruptions after Japan's earthquake in March.

A separate report from the Labor Department showed producer prices rose 0.2 percent in May, braking sharply from April's 0.8 percent increase.

The U.S. retail sales data ... will not change the impression of some meaningful slowing in underlying consumer spending in Q2, said Alan Ruskin of Deutsche Bank Securities.

U.S. stocks rose on the better-than expected retail sales number, while Treasury debt prices extended losses. The dollar rose against the yen.

The slowdown in economic activity comes at a time when there are few options for further monetary or fiscal stimulus.

The Federal Reserve is due to conclude its $600 billion government bond program at the end of the month and policymakers, who have faced intense criticism for risking inflation, have set the bar very high for a new program.

Reports from retailers underscored recent consumer reticence.

The biggest U.S. consumer electronics chain, Best Buy Co Inc, on Tuesday reported its fourth straight quarter of same-store sales declines on weak demand for televisions.

It said its same-store sales fell 1.7 percent in its first quarter, which ended May 28, including a 2.4 percent decline at its U.S. stores open at least 14 months.

Toys R Us Inc late Monday reported a 2.1 percent decline in U.S. same-store sales in the first quarter, which ended April 30, hurt by weak sales of seasonal products.

JOB GROWTH WEAK

A report earlier this month showed U.S. employers added a scant 54,000 workers to their payrolls in May.

Economists pin much of the recent weakness on high gasoline prices and supply chain disruptions from the earthquake and tsunami in Japan and say a new recession is not in the offing.

Instead, they look for activity to pick up in the second half of the year as gasoline prices continue to moderate and the situation in Japan improves, although sovereign debt problems in Europe remain a wild card.

That view was bolstered by the slowdown in wholesale prices, with core producer prices rising 0.2 percent last month after increasing 0.3 percent in April.

Retail sales last month were depressed by a 2.9 percent drop in sales of motor vehicles, the largest decline since February 2010, as a shortage of parts following the earthquake in Japan left inventories lean and prompted manufacturers to raise prices.

A second report from the Commerce Department showed motor vehicle stocks rose only 0.3 percent in April, leaving overall business inventories up 0.8 percent after increasing 1.3 percent in March.

Excluding autos, retail sales rose 0.3 percent last month, the smallest gain since July, after rising 0.5 percent in April.

Receipts at gasoline stations rose 0.3 percent after increasing 1.4 percent the prior month.

While cooling gasoline prices were also a drag on retail sales last month, they should help to ease some of the strain on household budgets and underpin growth.

Excluding gasoline, retail sales fell 0.3 percent after gaining 0.1 percent in April.

The report painted a generally weak picture of consumer spending, with sales at food and beverage stores falling 0.5 percent, while receipts at sporting goods, hobby, book and music stores dropped 0.4 percent.

Sales of electronics and appliances fell 1.3 percent, the largest decline since March 2010.

However, clothing store receipts edged up 0.2 percent last month, while sales at building materials and garden equipment suppliers rose 1.2 percent.

Core retail sales, which exclude autos, gasoline and building materials, rose 0.2 percent in May after advancing 0.3 percent in April. Core sales correspond most closely with the consumer spending component of the government's gross domestic product report.

Overall, there is nothing here to change our view that second-quarter real consumption is on track to increase by a very modest 1.3 percent annualized, said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 2.2 percent annual pace in the first quarter.

(Reporting by Lucia Mutikani and Pedro Nicolaci da Costa in New York; Editing by Andrea Ricci)

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