Dec. 7 (Bloomberg) -- Consumer confidence dropped more than forecast to the lowest in more than two years in December as fuel costs surged and credit and housing-market woes persisted.

The Reuters/University of Michigan preliminary index of consumer sentiment fell to 74.5, the lowest since the October 2005 reading following Hurricane Katrina. The gauge was 76.1 last month.

Americans had to pay more for gasoline and heating oil, borrowing became tougher and lower property values constrained opportunities to draw on home equity. The report may raise concern consumer spending, which accounts for more than two- thirds of the economy, will slow further, economists said.

``This month's decline reflects the fallout from the ongoing housing-market correction, the turmoil in the subprime market, the volatility in the stock market and rising gasoline prices,'' said Steven Wood, president of Insight Economics LLC in Danville, California.

The index was forecast to fall to 75, according to the median estimate of 63 economists in a Bloomberg News survey. Estimates ranged from 70 to 77.5. The gauge has averaged 88 since monthly data were first compiled in 1978.

A report earlier today showed the labor market is resilient even as the housing slump is deepening and lenders continue to restrict credit. The economy added 94,000 jobs in November, after 170,000 the prior month, the Labor Department said.

Fed Forecasts

The Federal Reserve will probably cut interest rates again next week to prevent the economy from slipping into a broader slowdown, economists said.

The expectations index, which some economists view as an indicator of future consumer spending, dropped to 63.2, also the lowest since October 2005, from 66.2 in November, today's report showed.

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, rose to 92.1 from 91.5.

Consumers said they expect an inflation rate of 3.5 percent in one year, the highest forecast since August 2006, compared with 3.4 percent in the November survey.

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

The worst housing recession in 16 years looks set to linger well into 2008. The number of Americans who fell behind on their mortgage payments rose to a 20-year high in the third quarter as borrowers were unable to refinance or sell their homes, the Mortgage Bankers Association reported yesterday.

Rising Fuel Costs

Fuel costs also remain a concern. The average retail price of regular gasoline has stayed above $3 a gallon since early November, up from an average $2.80 in October, according to AAA.

The holiday shopping season may signal how consumers are faring, economists said. The National Retail Federation has projected a 4 percent increase in U.S. sales during November and December, the smallest gain since 2002.

Bargains at Wal-Mart Stores Inc. and discounts of 50 percent or more at some other chains helped to lure shoppers last month, while Target Corp., J.C. Penney Co. and some mall-based retailers such as Limited Brands Inc. missed November sales predictions.

``Softness in the final week of November caused the month overall to fall short of our planned range,'' Bob Ulrich, Target's chief executive officer, said in a statement. ``Sales trends would need to meaningfully improve in December'' to achieve fourth quarter earnings growth, he said.

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

Last Updated: December 7, 2007 10:29 EST