Sales at retailers were unexpectedly strong last month, suggesting consumers were feeling a little more comfortable to spend and improving prospects for first-quarter economic growth.

Retail sales rose 0.5 percent as consumers stepped up spending not only on essential goods but luxury items as well, the Commerce Department said on Friday.

Optimism over the increase was tempered by a separate report showing that consumer sentiment ebbed slightly early this month. But analysts dismissed the slip as insignificant and focused on the gain in sales as a hopeful economic sign.

After considerable hand-wringing about the underlying strength of retail sales in the past few months, this is a solid report. It indicates the recovery is on track, said Brian Bethune, chief U.S. financial economist at IHS Global Insight in Lexington, Massachusetts.

Retail sales are being closely watched to determine whether consumers can sustain the economy's recovery once government stimulus and the boost from restocking by businesses wanes.

Not only did the January sales increase come in above the 0.3 percent economists had forecast, sales data for December and November were revised upward as well. Compared to January last year, sales increased 4.7 percent.

While the report on consumer confidence showed worries over unemployment were weighing on sentiment, the slight slip left intact a longer-term trend toward improvement.

The Reuters/University of Michigan Surveys of Consumers' preliminary index of sentiment came in at 73.7 for February, down from 74.4 in late January but up from 56.3 a year ago. Analysts had expected a rise to 75.0.

February's retracement does not seem to signal a fundamental shift in sentiment and is not likely to mean much for spending patterns in the months ahead, said Stephen Stanley, chief economist at RBS in Stamford, Connecticut.

CHINA HURT STOCKS

Worries that a surprise move by China to raise bank reserve requirements could hurt the global recovery, overshadowed the retail sales report, hurting U.S. stocks. The dollar neared a nine-month high against the euro, helped by skepticism over a proposed rescue deal for debt-stricken Greece.

The U.S. economy has grown for two straight quarters following the worst downturn since the Great Depression of the 1930s. Growth in the fourth quarter came in at a 5.7 percent annual rate, the fastest in six years.

Analysts, who are also tracking the impact of recent severe winter weather on the economy, said the year's strong start to sales bodes well for first-quarter spending and growth.

Even folding in potentially weak February consumption as a result of severe weather and automaker difficulties, it appears that real consumer spending is on a 2.5-3 percent quarterly trajectory, said Steven Wieting, an economist at Citigroup in New York.

Core retail sales, which correspond most closely with the consumer spending component of the government's gross domestic product, rose 0.8 percent after falling 0.3 percent in December. Consumer spending rose at a 2 percent annual rate in the fourth quarter.

While the U.S. recovery is gaining momentum, Europe has faltered. GDP in the 16-country euro-currency zone rose only 0.1 percent in the fourth quarter from the prior quarter, well short of the 0.4 percent rise that lifted it from recession in the third quarter.

A second report from the Commerce Department showed U.S. business inventories slipped 0.2 percent in December after rising 0.5 percent in November.

Analysts said the decline was smaller than the government had estimated when it released figures on fourth-quarter economic growth last month and, together with upward revisions to retail sales, would offset the negative impact on fourth-quarter GDP from a bigger than expected trade deficit.

Motor vehicle and parts purchases were flat last month, after rising 0.1 percent in December. Excluding motor vehicles and parts, retail sales rose 0.6 percent in January after slipping 0.2 percent the prior month.

Electronics and appliance stores saw a rebound in sales and consumers continued to splurge on sporting goods, hobby-related items, books and music last month. Sales at general merchandise stores rose 1.5 percent in January, the biggest gain since February 2009.

For a graphic comparing retail sales and consumer sentiment, see: http://graphics.thomsonreuters.com/0210/US_RTLSLS0210.gif

(Additional reporting by Chris Reese New York)

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