Growth in retail sales stalled in August, hurt by a pitched battle over spending in Congress and raising fresh questions about the country's ability to steer clear of a double-dip recession.

Sales were unchanged from a month earlier, a Commerce Department report showed on Wednesday.

It was a weaker reading than expected and sales growth during June and July were revised downward.

Consumer confidence plunged in August after a bruising battle over the budget slammed stock prices and pushed the nation to the brink of default.

The consumer reacted to the debt ceiling, the downgrade and the equity market swoon by basically hunkering down and not spending, said Tom Porcelli, senior U.S. economist at RBC Capital Markets in New York.

Consumer spending accounts for about two-thirds of U.S. economic activity, and the data suggests growth in the first two months of the third quarter was weaker than many economists expected.

Congress let a debate over spending go down to the wire early last month, nearly leaving the government unable to pay its bills. The country's debt was then downgraded by a major rating agency.

Major stock indexes opened up and Treasury debt prices fell after the head of the European Commission said it would soon present options for the introduction of euro area bonds, a move investors have seen as helping address the region's crisis.

RECESSION FEARS

A Reuters poll showed economists see a nearly one-in-three chance the United States could reenter recession and many economists expect the Fed will unveil new measures to boost growth following its Sept 20-21 policy review.

A separate report from the Labor Department showed U.S. producer prices were unchanged in August, held down by a drop in energy goods costs.

The producer price report sends the Fed mixed signals about price pressures, with energy costs abating but core prices showing some pass-through of recent surges in energy and food costs.

President Barack Obama is lobbying Congress to approve a stimulus plan delivered to lawmakers on Monday.

Economic growth slowed sharply during the first half of the year, and the economy is vulnerable to potential shocks like an escalation of Europe's debt crisis.

(The data) shows the slowdown in the economy is real, said Steven Ricchiuto, chief economist at Mizuho Securities in New York.

On Wednesday, Moody's cut the credit ratings of two French banks because of exposure to debt from troubled Greece, while the European Commission signaled it would soon present options on how the euro zone might issue bonds jointly -- a measure that would be aimed at propping up the zone's weaker members.

Treasury Secretary Timothy Geithner tried to shore up confidence in Europe's ability to solve its crisis, saying they had the financial and economic capacity to do so.

In the retail sales report, an increase in sales of electronics, gasoline and food was balanced with drops in purchases of cars, furniture and clothes. Spending at restaurants and bars also dipped.

Stripping out sales of gasoline, autos and building materials, so-called core retail sales rose 0.1 percent in August, pointing to some resilience. Excluding just autos, sales also were up 0.1 percent.

INVENTORY GROWTH SLOWS

Business inventories rose slightly less than expected in July, suggesting firms remained cautious about future demand at the start of the third quarter.

Inventories climbed 0.4 percent, following an upwardly revised 0.4 percent rise in June, the Commerce Department said in another report on Wednesday. Economists had expected a rise of 0.5 percent in July.

(Additional reporting by Mark Felsenthal in Washington and Richard Leong and Emily Flitter in New York; Editing by Andrea Ricci and Neil Stempleman)

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