WRAPUP 3-U.S. job market rut deepens consumer gloom

* Consumer confidence posts biggest drop in eight months

* Americans felt job market was worsening

* House prices rise for a fourth straight month (Adds market reaction, comments from Robert Shiller)

By Pedro da Costa and Julie Haviv

NEW YORK, Oct 27 (Reuters) - U.S. consumer confidence deteriorated sharply in October as the worst job market in a quarter century heightened concerns about the future, more than outweighing modest improvements in the housing sector.

Despite the stability in house prices, which saw a fourth month of gains in August, a report from The Conference Board suggested Americans are far from upbeat.

The industry group's confidence index dived to 47.7 this month from 53.4 in September, the biggest drop in eight months. The report was unequivocally weak, with the expectations index plunging to 65.7 from 73.7.

The drop in consumer confidence raised concerns about spending, pushing U.S. stocks lower, while the dollar rose to a two-week high against the euro as the data boosted the greenback's safe-haven appeal.

The latest figures cast doubt on the recovery's strength.

"We will get at least a 3 percent gain in third-quarter GDP on Thursday, but today's report suggests that isn't going to last into the fourth quarter," said economist Cary Leahey with Decision Economics in New York.

Persistent trouble in the labor market was a major culprit. The proportion of respondents saying jobs were hard to get rose to 49.6 from 47.0 percent.

"Consumers' assessment of present-day conditions has grown less favorable, with labor market conditions playing a major role," said Lynn Franco, director of The Conference Board Consumer Center Research.

The current conditions indicator fell to 20.7, and is near its lowest level in 26 years. This mirrored the labor market, where the current jobless rate of 9.8 percent is the highest since 1983.

At least home prices, battered by a severe recession in housing, appeared to be finding a footing. The Standard & Poor's Case/Shiller report on house prices showed its index of prices in 20 cities rose 1.2 percent, outpacing median forecasts of economists polled by Reuters.

The rise helped moderate the year-on-year price decline, slowing it to 11.3 percent. Gains in home prices have slowed as consumer confidence has waned slightly.

(For a graphic of recent home price and confidence readings, see here)

ARE BUBBLES BACK?

Robert Shiller, professor of economics at Yale University and co-developer of the home price index, told Reuters Television the gains in U.S. home prices in recent months are not sustainable and increases in some areas of the country are worrisome. [ID:nN27256628]

Home prices in certain areas, such as Minneapolis, Minnesota and San Francisco, California, have showed double-digit gains over the span of a mere four months, and if viewed on an annualized basis, they look like they are back in "bubble territory," Shiller said.

"It is a time of great uncertainty," he added.

The composite index of prices in 10 metropolitan areas gained 1.3 percent in August after a 1.7 percent rise the previous month.

The monthly price increases helped the annual rates, with the yearly pace of declines in home prices slowing to a 10.6 percent drop in the 10-city index.

While the U.S. housing market, a primary driver of the worst U.S. recession since the 1930s, has found some footing after a three-year slump, it remains highly vulnerable to setbacks.

One such pitfall is the possible expiration of a popular $8,000 tax break for home buyers. There was some hope on Tuesday after top Democrats in the Senate reached an agreement to extend the tax credit for first-time homebuyers. [ID:nN27259887]

(Additional reporting by Jennifer Rogers, Editing by Chizu Nomiyama)