* U.S. retail sales rise 1.1 percent in September
* Consumer sentiment slips unexpectedly in early October
* Sales ex-cars, gas, building supplies up 0.6 percent
* Data suggests stronger Q3 GDP than had been expected
By Jason Lange
WASHINGTON, Oct 14 (Reuters) - U.S. retail sales in September grew at the fastest pace in seven months as consumers shook off concerns about a weak stock market and political gridlock, giving a bit more momentum to the economic recovery.
The data, which beat economists' expectations and eased concerns the U.S. could slip back into recession, overshadowed a separate report showing a surprise drop in consumer confidence in early October.
The Commerce Department said on Friday that retail sales rose 1.1 percent in September, with strong auto purchases providing a big boost. Sales for August and July were revised higher as well.
"Reports of the consumer's demise have been greatly exaggerated," said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Conn.
U.S. stocks rose on the retail data and on growing optimism the euro zone would be able to contain its debt crisis. Prices for U.S. government debt fell as investors took on more risk.
Consumer spending accounts for about two thirds of U.S. economic activity, and the report suggested the economy had more vigor over the past three months than earlier believed.
Economists across Wall Street bumped up forecasts, with Macroeconomic Advisers saying the country's economic output likely grew at a 2.7 percent annual rate in the third quarter, six-tenths of a point more than its previous view.
"It looks like third-quarter GDP is going to be better than the first and second quarter combined," said John Canally, an investment strategist and economist for LPL Financial in Boston.
However, signs the U.S. recovery is strengthening -- growth averaged under a 1 percent pace in the first half of the year -- have not dispelled recession risks. A slowdown in Europe, where debt-laden countries are enacting austerity measures, could still weigh heavily on the United States.
Consumer confidence plunged over the summer as a bruising battle over the U.S. budget slammed stock prices and pushed the nation to the brink of default.
After a modest reprieve in September, consumer sentiment for October sagged to 57.5 in the preliminary Thomson Reuters/University of Michigan survey for October, with expectations dropping to its weakest level in more than 30 years.
But September's reasonable spending pace showed the crisis of confidence might not keep shoppers out of stores.
Indeed, Americans lined up on Friday to buy Apple Inc's latest iPhone as it went on sale.
"Obviously consumers are still willing to go out and shop," said Gary Thayer, a strategist at Wells Fargo Advisors in St. Louis, Missouri. "If the economy takes a clear turn for the worse we would expect sales to suffer, but at least this time the shock to confidence has not derailed consumer spending."
Within the retail report, sales of motor vehicles and parts rose 3.6 percent last month, the biggest gain since March 2010. Earlier this month, data showed U.S. auto sales rose to an annual rate of 13.1 million vehicles in September, a five-month high.
The U.S. economy took a hit earlier in the year from a spike in gasoline prices and a March earthquake in Japan that clogged global supply conduits, hurting auto output and sales.
While car sales are now bouncing back, even excluding autos, retail sales increased 0.6 percent in September, above forecasts for a 0.3 percent gain.
Separate reports on Friday showed higher growth in business inventories during August -- which also helps growth -- as well as an unexpected rise in import prices in September.