Sales at U.S. retailers rose at their fastest pace in three-and-half years in August and a gauge of manufacturing in New York State hit a near two-year high, bolstering views the economy was emerging from recession.

The Commerce Department said on Tuesday total retail sales climbed 2.7 percent, the biggest monthly advance since January 2006, after declining by a revised 0.2 percent in July. Sales in July were previously reported to have eased 0.1 percent.

Analysts polled by Reuters had forecast retail sales rising 2.0 percent in August. Sales in August were a bolstered by the government's cash for clunkers program, which gave consumers cash to swap aging gas-guzzlers for new, more fuel efficient models. High gasoline prices also added to the rise in sales.

The V-shaped recovery just got a badly needed shot in the arm today as the consumer is back in the game in a big way, said Chris Rupkey, chief financial economist at Bank of Tokyo/Mitsubishi UFJ in New York.

U.S. stock index futures added to gains, while Treasury debt prices fell on the data.

Motor vehicle and parts sales surged 10.6 percent in August, notching their biggest rise since October 2001. The auto scheme ended in August.

The retail sales report also showed signs of strength across almost all sectors, with the exception of furniture and building materials, evidence that household spending was probably mending.

Consumer spending accounts for about 70 percent of U.S. economic activity.

Excluding motor vehicles and parts, sales jumped 1.1 percent in August after falling 0.5 percent in July. Economists had expected a 0.4 percent increase.

Indications are that the economy is in the early phase of recovery from the worst recession in seven decades, but lackluster household demand means the process will lack vigor. Rising unemployment is decimating household incomes.

The retail sales data fanned optimism consumer spending would rise in the current quarter after falling in the April-June period.

MORE SHOPPING, LESS DEBT?

While retail sales rose last month, a report from major credit card issuer suggested consumers were using plastic less to make purchases.

Mastercard Inc's finance chief said the volume of transactions processed fell 8 percent in July and August in the United States.

A report from the New York Federal Reserve showed a gauge of manufacturing in New York State rose to its highest level in almost two years in September.

The New York Fed's Empire State general business conditions index rose 18.88 in September -- the highest since November 2007 -- from 12.08 in August. Economists polled by Reuters had expected a September reading of 14.00.

The survey of manufacturing plants in the state is one of the earliest monthly guideposts to U.S. factory conditions.

Separately, U.S. producer prices rose more than twice as much as expected in August on the biggest surge in gasoline prices in more than 10 years and prices declined less than expected compared with a year ago, the Labor Department said.

Prices paid at the farm and factory gate jumped 1.7 percent last month and fell 4.3 percent from August 2008. Analysts expected producer prices to rise 0.8 percent on the month and to fall 5.3 percent on the year.

(Reporting by Lucia Mutikani; Additional reporting by Mark Felsenthal and Emily Kaiser; Editing by Andrea Ricci)

Manufacturing Retail sales Energy