Surprise retail sales rise doesn't dispel gloom

By Mark Felsenthal

WASHINGTON (Reuters) - U.S. retail sales rose unexpectedly in March as consumers dug deep to cover record high gasoline costs, according to a government report on Monday that did little to dispel the gloom hanging over the economy.

Retail sales increased 0.2 percent last month after a 0.4 percent fall in February, the Commerce Department said. Wall Street analysts were expecting sales to hold steady.

The rise, however, reflected a surge in gasoline prices that pushed gas station receipts up a sharp 1.1 percent.

Excluding gasoline, sales were flat last month, suggesting the consumer spending that fuels two-thirds of the economy's thrust is flagging.

"It is a report that seems to highlight that consumers are moving into a more cautious mode," said Drew Matus, senior financial economist at Lehman Brothers in New York.

The rise in retail sales initially lent U.S. stocks some support, but stocks later fell as an unexpected quarterly loss at Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz) hurt bank shares. Bond prices also fell in thin volume, while the dollar was little changed.

RECESSION BOUND?

The data follows a report last week showing U.S. consumer sentiment hit its lowest level in more than a quarter century in April as worries on jobs and inflation darkened shoppers' moods.