US consumer sentiment dropped more than expected in early August, registering its lowest reading since just after Hurricane Katrina a year ago, a report showed yesterday.

Turmoil in the Middle East and higher gasoline prices in the first half of August also increased consumers' expectations for inflation, a potentially troubling sign for the Federal Reserve.

The University of Michigan's preliminary reading of consumer sentiment in August was 78.7, down from July's final reading of 84.7, said sources who saw the subscription-only report.

US stocks fell while government debt prices were steady at higher levels after the data. The dollar fell against the euro but quickly rebounded.

"It's a very stagflationary kind of result," said Peter Kretzmer, senior economist at Banc of America Securities LLC in New York. "This is a larger downward move than what we've seen even though gasoline prices haven't moved that much higher in the month of August."

Gasoline prices hit an all-time high near $3.03 (€2.36) a gallon at the end of last week but should begin to fall as the summer driving season comes to an end, according to the Lundberg industry survey.

The University of Michigan's index of current conditions fell to 100.8 from 103.5 in July while consumer expectations slid to 64.5 from 72.5.

Consumer spending accounts for about two-thirds of US economic activity but in recent years confidence measures have been a weak guide to actual spending.

The declining housing market is also weighing on consumer sentiment as most of the latest data show a sector that is rapidly cooling, analysts say.

Also yesterday, the Economic Cycle Research Institute, an independent forecasting group, reported that its weekly index of US economic growth ticked up slightly. - (Reuters)