The U.S. economy grew more quickly than previously thought in the fourth quarter, the government said on Friday, but signs of softer consumer and business spending may slow its momentum in early 2011.

Another report showed consumers in March were their most downbeat in over a year as food and gasoline prices jumped.

Gross domestic product rose at an annualized rate of 3.1 percent, the Commerce Department said in its final estimate, revised up from 2.8 percent.

The consumer sentiment report added to some recent economic data -- excluding employment and manufacturing -- that suggested growth in the first three months of 2011 would at best match the fourth-quarter pace, or slow.

It is encouraging that the economy did a little better than initially reported, but first-quarter GDP is shaping up to be on the soft side, said Ryan Sweet, a senior economist at Moody's Analytics in West Chester Pennsylvania.

According to Sweet, data so far suggests growth in the first three months of 2011 was between 2.5 and 3 percent.

Rising fuel prices, boosted by unrest in the Middle East and North Africa, are largely blamed for the expected pullback in growth, although economists expect it will be temporary.

As yet, no big impact on the U.S. economy is expected from the devastating earthquake and tsunami in Japan, which have caused volatility on the stock market.

Assuming that oil prices stabilize and fall a little and that Japanese reconstruction and recovery will begin in the next few months, this softness in growth is likely to be short-lived, said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts.

The Thomson Reuters/University of Michigan index on consumer sentiment fell to 67.5 this month, the lowest since November 2009, from 77.5 in February.

U.S. financial markets were little changed by the reports, although stocks pushed higher on Oracle Corp's, upbeat outlook.

INVENTORIES, BUSINESS SPENDING STRONGER

Economists had expected GDP growth, which measures total goods and services output within U.S. borders, to be raised to a 3.0 percent pace. The economy expanded at a 2.6 percent rate in the third quarter. For all of 2010, it grew 2.9 percent.

The higher fourth-quarter growth estimate reflected stronger business inventory accumulation and spending.

Business inventories increased $16.2 billion, instead of the $7.1 billion estimated last month. That was still a sharp step down from the third quarter's $121.4 billion rise. Inventories lopped off a smaller 3.42 percentage points from GDP growth, instead of 3.70 percentage points.

Excluding inventories, the economy grew at an unrevised 6.7 percent pace, the fastest rise in domestic and foreign demand since 1998. Domestic purchases grew at a 3.2 percent rate.

Businesses are expected to have stepped up restocking of their shelves in the first quarter, which should cause inventories to make a positive contribution to growth.

In the last three months of 2010, business investment rose at a 7.7 percent rate, revised up from 5.3 percent, lifted by spending on equipment and software, as well as on structures. Spending grew at a 10.0 percent pace in the third quarter.

Government data on Thursday showed a drop in business spending plans for a second straight month in February, indicating a softening in business investment.

Still, Oracle, the world's third-largest software-maker, forecast solid sales this quarter.

The government also reported on Friday that corporate profits increased 3.3 percent in the fourth quarter after rising 0.2 percent in the prior period. Economists said solid profits should encourage businesses to step up hiring.

For the whole of 2010, corporate profits grew 20.4 percent, the most since 2004.

Consumer spending -- which accounts for more than two-thirds of U.S. economic activity -- grew at a 4.0 percent rate in the fourth quarter instead of 4.1 percent. It was still the fastest since the last three months of 2006 and was an acceleration from the third quarter's 2.4 percent rate.

Rising gasoline and food prices in early 2011 could further hit spending.

The surge in food and energy prices has almost entirely offset the big boost to real spending we anticipated from the payroll tax cut, said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto, referring to part of a broad tax cut plan introduced by the Obama administration.

After adding to growth, trade was expected to become a drag in the first quarter as imports picked up again. Government spending subtracted from GDP growth in the fourth quarter, a status quo that was expected to prevail in the near-term as the boost from the $814 billion stimulus package wanes.

(Editing by Dan Grebler)

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