WRAPUP 2-US consumer sentiment up, recession talk prevails

(Updates prices, adds comments)

By Ros Krasny

CHICAGO, Jan 18 (Reuters) - U.S. consumers' mood unexpectedly brightened a bit in January but failed to silence the drumbeat of talk about a possible economic downturn.

A second report report on Friday showed leading economic indicators for December continued to weaken, suggesting growth will remain sluggish for some time.

The reports came on a day when the White House announced plans for temporary tax cuts and other measures to fend off a possible recession. The U.S. Federal Reserve is also widely expected to slash interest rates by the end of the month.

The Reuters/University of Michigan consumer confidence reading for January was 80.5, well above the Wall Street consensus of 74.5. The reading rose from 75.5 in December, which was the weakest since October 2005, right after Hurricane Katrina.

"Given that economic conditions worsened significantly in early January, the current improvement in consumers' mood is hard to justify," said Anna Piretti, economist at BNP Paribas in New York.

Still, the promise of fiscal measures and interest rate cuts could counter some of the gloom created by recent stock market losses, countered Cary Leahey, economist at Decision Economics in New York.

The confidence report's assessment of current conditions was 98.1, up from 91.0 and the highest since August. The expectations measure was 69.1, up from 65.6.

Still, consumers took a negative view toward their current finances, shell-shocked as year-end statements on retirement savings accounts and brokerage accounts started to flood their mailboxes.

The University of Michigan said the data was consistent with personal spending growth of a modest 2 percent in 2008 -- hardly suggesting boom times.

"Despite this month's increase, households are still quite nervous about the state of the economy," said Steven Wood, economist at Insight Economics in Danville, California. "The index is just above recessionary levels."

In recent years consumer sentiment has not correlated well with retail spending, since many Americans apparently have been prepared to spend their way through good times and bad.

"The consumer has been the bulwark of the economy, contributing to growth for 63 consecutive quarters," said Chris Low, chief economist at FTN Financial in New York.

Now, the negative "wealth effect" of plummeting share prices, weak residential real estate, pain at the gasoline pump and shrinking access to credit has suggested that consumers are finally on the verge of buckling.

In a speech on Thursday, Cleveland Federal Reserve Bank President Sandra Pianalto tied a recent slowing in consumer spending to reduced household wealth.