Consumer sentiment worsened this month on renewed concerns about the outlook for the economy and as gloom about job and income prospects persisted, data showed on Friday.

But a separate report suggested the pace of the recovery could soon pick up after spinning its wheels in the first half of the year.

Taking the unexpected soft patch into account, the International Monetary Fund cut its forecast for U.S. economic growth, warning Washington and debt-ridden European countries that they are playing with fire unless they take immediate steps to reduce their budget deficits.

While the IMF thinks downside risks to growth have increased, it still expects the economy to gain speed next year.

U.S. consumer sentiment declined more than expected in June, the Thomson Reuters/University of Michigan survey showed, as consumers remained pessimistic about stagnant incomes and job prospects.

Job growth is, at best, anemic and the unemployment rate is high. If you've been laid off, it's probably been for a long period of time, said Cary Leahey, economist and managing director at Decision Economics in New York. That can't help but affect these sentiment figures.

The preliminary reading showed the index at 71.8, down from 74.3 the month before. It was below the median forecast of 74.0 among economists polled by Reuters.

Although the data gave little evidence a new downturn is underway, the survey found most consumers believe the last recession has not yet ended.

Consumers' view of rising prices was also mixed as the survey's one-year inflation expectation fell to its lowest since February, to 4.0 percent from 4.1 percent. But the five-to-10-year inflation outlook was at 3.0 percent, edging up from 2.9 percent.

A separate report showed a gauge of future economic activity rose more than expected in May, but high gasoline prices and a weak housing market will see growth remaining moderate.

The independent Conference Board said on Friday its Leading Economic Index increased 0.8 percent to a record high of 114.7 after a revised 0.4 percent fall in April. Economists had expected a rise of 0.2 percent.

U.S. stocks rose immediately following the data and were higher at midday. Investors were also cheered as the leaders of France and Germany said they were united behind a new aid package for debt-burdened Greece.

The economic indicators rise was an encouraging sign after recent downbeat data and underscored Thursday's releases that showed a better-than-expected picture of the labor and housing markets, but a contraction in Mid-Atlantic factory activity in June.

This rebound in the leading indicators index is an encouraging sign that the recent slowdown in the economy may be short lived, Nicholas Tenev, an economist at Barclays Capital, wrote in a note.

On Friday, the IMF forecast that U.S. gross domestic product would grow a tepid 2.5 percent this year and 2.7 percent in 2012. In its forecast just two months ago, it had expected 2.8 percent growth in 2011, rising to 2.9 percent in 2012.

Political wrangling over how to deal with the euro zone's debt crisis and the United States' budget could create major financial volatility in coming months, the IMF said.

U.S. lawmakers are in talks to reach a deficit-cutting deal that would give Congress the political cover to raise the $14.3 trillion debt limit well before August 2, when the Treasury Department has warned it will run out of money to pay the government's bills, a development that could disrupt the economic recovery.

Negotiators said on Thursday they had tentatively agreed on a number of cuts and are now gearing up for tough trade-offs that could lead to trillions of dollars in savings.

(Additional reporting by Ellen Freilich; Editing by Neil Stempleman)

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