Household morale drops in U.S. and Europe

NEW YORK/PARIS (Reuters) - Household confidence, strained by high fuel prices, slid on both sides of the Atlantic this spring, and weak property markets continued their drag on major economies, data showed on Tuesday.

U.S. consumer confidence fell to a 16-year low in June while inflation expectations held at their recent record high. Consumer evaluations of future prospects also hit a record low, the Conference Board said.

U.S. home prices extended their record slide in April, with every top metropolitan area posting annual losses and many showing double-digit declines, according to the closely watched Standard & Poor's/Case Shiller home price index.

New British home loan approvals dived at their sharpest annual pace in at least a decade to hit a record low in May, raising fears the housing slowdown is about to escalate into a crash.

The news fanned worries about stagflationary conditions of low growth and high inflation in major economies and heightens the dilemma facing the Federal Reserve when it meets on Tuesday and Wednesday to discuss U.S. interest rates.

"It sends out the signal that the consumers are not about to ramp up their spending," Dana Saporta, economist at Dresdner Kleinwort Securities llc in New York, said of the latest data.

"This argues for a steady Fed policy. The prospects for growth will make it difficult for the Fed to raise rates even in the face of surging commodity prices."

U.S. and European stock markets extended losses after the U.S. consumer confidence data, while euro zone and U.S. government bonds extended gains.

LOOKING FOR BOTTOM

In an interview on Mexican television, U.S. Treasury Secretary Henry Paulson said he thought that most of the slump in U.S. housing prices would be over by year-end and that growth should be stronger by then.

However, former U.S. Federal Reserve Chairman Alan Greenspan cautioned that the U.S. economy was "on the brink" of a recession.

In Europe, the latest consumer reports showed steeper morale declines than analysts forecast for Denmark and Italy in June, and a survey of the outlook on consumer spending in Germany in July was also weaker than experts estimated.

Market research group GfK said its forward-looking consumer sentiment index, based on a survey of 2,000 Germans, fell to 3.9 for July after a revised 4.7 for June, well below forecast.

"Spiraling energy costs and the threat of a further massive rise in the price of gas are increasingly dampening the consumer mood in Germany," Nuremberg-based GfK said in a statement.

After sometimes violent protests over food prices in much of the developing world in recent months, high retail fuel prices, caused by crude prices at all-time records, are fanning further protests in rich and poor countries alike.

In May, annual headline inflation rates hit 4.2 percent in the United States, 3.7 percent in the 15-country euro zone, 3.9 percent in the 27-strong European Union and 3.3 percent in Britain. Rates are even higher in emerging market economies.

Inflation has become the most important issue for European Union citizens, a twice-yearly EU survey showed on Tuesday, nine days before the European Central Bank is expected to raise interest rates to stem record price rises.

Wall Street anticipates the Federal Reserve, weighing rising inflationary concerns against a still-weak economy, will hold short-term interest rates steady at the conclusion of its two-day meeting on Wednesday. It would be the first time since it began a rapid easing cycle last September

The global inflation threat was highlighted in the past 24 hours by massive price increases announced by some of the world's largest basic materials conglomerates.

Mining titan Rio Tinto secured an agreement with China's largest steel maker to nearly double the price Rio gets for iron ore, and rival producer BHP Billiton is expected to follow through with similar price hikes.

Dow Chemical Co said it would raise prices up to 25 percent, just weeks after the largest U.S. chemicals maker implemented a 20 percent across-the-board price increase.

CATCHING COLD

Europe's economy grew strongly in the first three months of the year but economists maintain -- and an increasing number of politicians concede -- that that was the final flurry before Europe starts to suffer a U.S.-induced downturn.

German gross domestic product expanded at a stellar rate of 1.5 percent in the first quarter, compared with the last three months of 2007, but politicians are preparing for bad news now.

"Nil (growth) probably would be a good result for the second quarter," German Deputy Economy Minister Walther Otremba told reporters in Berlin. "It may even be negative."

(Additional reporting from bureaus across Europe and the U.S.; Editing by Dan Grebler)