Consumer sentiment fell further than expected in late October to its lowest in more than a year as concerns about the housing slump darkened the economic outlook, a survey released on Friday showed.

The Reuters/University of Michigan Surveys of Consumers said its late October figure on consumer sentiment was 80.9, down from the month's preliminary reading of 82 and the final September reading of 83.4. It was the lowest reading since May 2006 when the index stood at 79.1.

Economists polled by Reuters had expected the final October figure to remain unchanged from early in the month at 82.

Consumer sentiment is often seen as a proxy for future spending, which accounts for two-thirds of the U.S. economy.

The stock and government bond markets largely held steady after the report, which did not change expectations for a rate cut by the Federal Reserve next week.

The decline in sentiment was driven by eroding expectations about future economic conditions. The gauge that measures these expectations dropped to 70.1 from the preliminary reading of 71.6 and September's 74.1 to its lowest in a year, the survey group said.

"People are scared because you have oil over $90 a barrel. You also have the housing (slump) scaring them. Both worries are hitting them at the same time," said David Wyss, chief economist at Standard & Poor's Ratings Services in New York.

"When consumers get scared, they are going to be spending less money and that's not good for economy," he added.

Unlike previous years, when confidence fell due to transitory factors such as brief spikes in gasoline prices, the current decline was driven by concerns about falling home prices, the group said.

Twenty-eight percent of homeowners said the value of their home declined, above the 1992 peak of 24 percent who said that during the last housing slump, according to the survey. Twenty-two percent of homeowners expect the value of their home to decline in the year ahead, up from 14 percent who said that three months ago.

The group expected confidence to erode further as house prices continue to slide and prices for gas and home heating rise.

"Each downward step raises the probability of recession, which is still below 50 percent but not comfortably so," the group said.

For now, the data still indicate an average growth rate of 2.0 percent in personal consumption expenditures over the next four quarters, with the weakest quarters around the turn of the year, the survey group said.

But the data implied continued declines in housing starts and home sales through at least mid-2008, the group said.

The survey's gauge of current consumer conditions was 97.6 in late October, below the preliminary reading of 98.2 and the September level of 97.9. It stood at 107.3 in October 2006.

The survey's one-year inflation index was unchanged from September at 3.1 percent, but up from October's preliminary reading of 3.0 percent. The five-year index was unchanged from early October at 2.8 percent but down from 2.9 percent in September.

(Additional reporting by Ellen Freilich and Richard Leong)

Inflation