Aug. 31 (Bloomberg) -- Confidence among U.S. consumers fell in August to the lowest in a year, hurt by turmoil in credit markets and a decline in share prices.

The Reuters/University of Michigan final index of consumer sentiment fell to 83.4 this month from 90.4 in July. The reading compares with a preliminary figure of 83.3 for August.

Americans may cut back on the spending that accounts for two-thirds of the economy as the worst housing slump in 16 years erodes property values. Job and wage gains, which have sustained consumer spending, are at risk as builders and mortgage companies fire workers.

``Consumers are nervous about the state of the housing market and the state of the stock market,'' said David Sloan, a senior economist at 4Cast Inc. in New York. ``There's a risk the wealth effect will pull the consumer back and also feed through into a slowdown in employment growth.''

Consumer spending rose more than forecast in July and inflation cooled, a government report showed earlier today, signaling the economy was expanding at the start of the third quarter before credit markets deteriorated.

Spending rose 0.4 percent in July after a 0.2 percent increase in June that was bigger than initially estimated, the Commerce Department said. The Federal Reserve's preferred measure of inflation rose less than forecast.

The final confidence index for August was forecast to fall to 82.5, the median forecast in a Bloomberg News survey of 63 economists. Estimates ranged from 80 to 86.5. The gauge has averaged 88.1 since monthly data were first compiled in 1978.

Expectations Lower

The expectations index, which some economists view as an indicator of future consumer spending, fell to 73.7 this month from 81.5 in July.

A gauge of current conditions, which reflects Americans' perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars, declined to 98.4 from 104.5.

Consumers said they expect an inflation rate of 3.2 percent in one year, compared with 3.4 percent in the July survey.

The final Michigan consumer confidence report for the month reflects about 500 responses, compared with the 300 households surveyed for the preliminary survey.

Housing woes continue to weigh on consumers. An index of mortgage applications to buy a house or refinance a loan slid to a four-week low last week, while the rate on one-year adjustable loans jumped by the most ever, the Mortgage Bankers Association said Aug. 29. A government report yesterday showed house prices in the second quarter rose at the slowest pace in a decade.

Credit Markets

A separate report from the Conference Board on Aug. 28 showed Americans' confidence dropped in August by the most since Hurricane Katrina two years ago, reflecting the turmoil credit- markets that started with a wave of defaults among so-called subprime mortgages.

Share-price declines have compounded the woes of many Americans. Standard & Poor's 500 Index had fallen 6 percent through yesterday after reaching a record on July 19.

The Federal Reserve on Aug. 17 cut the interest rate at which it lends to banks, and policy makers acknowledged that the risks to the six-year economic expansion have risen ``appreciably.''

The central bank ``continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets,'' Fed Chairman Ben S. Bernanke said today at the Kansas City Fed's annual symposium in Jackson Hole, Wyoming.

A decline in gasoline costs has offered consumers some consolation. The average price of regular gasoline at the pump fell to $2.75 a gallon on Aug. 28, 11 cents lower than at the end of July, according to AAA.

Consumer Spending

Consumer spending in the second quarter was revised up to an annual rate of 1.4 percent, from an initial estimate of a 1.3 percent increase, the Commerce Department said yesterday. The gain was still the smallest in a year.

Retailers' sales at stores open at least a year will probably rise 2 percent to 2.5 percent in August from a year earlier, the smallest gain for that month since 2004, the International Council of Shopping Centers forecast.

Sears Holdings Corp., the largest U.S. department-store chain, said yesterday that second-quarter profit sank 40 percent on declining sales at Kmart and its namesake chain. Revenue fell for most merchandise categories, and the Hoffman Estates, Illinois-based retailer had to cut prices on spring and summer clothing to clear its shelves.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

Last Updated: August 31, 2007 11:01 EDT