NEW YORK -- American consumers went on a spending spree in March even as sentiment was hitting decade lows, and a rebound in confidence in early April suggests consumption should stay strong enough to steer the economy clear of recession.

A report released on Friday showed retail sales last month far outstripped expectations by jumping 2.1 percent, the biggest gain in 17 months.

Meanwhile, the University of Michigan's consumer sentiment index rebounded smartly in April to 83.2, courtesy of the startling progress of U.S. led-forces in the Iraq war. The gain left March's nine-year trough of 77.6 a distant memory. "The turning point has come," said Ram Bhagavatula, chief economist at RBC Bank of Scotland financial markets. "Consumers keep surprising and the revival in confidence should help support spending going forward, so underpinning the economy."

Tempering the joy was a steep 1.5 percent rise in factory gate prices, although analysts noted the recent subsidence in energy prices should restrain inflation going forward.

"The bottom line is that neither the economy nor inflation is as weak as many people assumed," said Jim O'Sullivan, senior U.S. economist at UBS Warburg.

That in turn suggested the Federal Reserve could afford to bide its time on monetary policy.

"We always expected the Fed to stay on hold and watch and wait, and these reports reinforce that view," O'Sullivan added.

The Central Bank has repeatedly stated that geopolitical uncertainty obscured the true state of the economy and that growth would pick up once the war in Iraq was over.

Financial markets were initially heartened by the remarkable resilience of the U.S. consumer, but equities were unable to shake doubts about corporate profits and lost all their early gains.

The dollar held its advance while investors in fixed-income debt were less happy that the fed might not cut rates again and shoved treasury prices lower. ***** Devil in the Details *****

Analysts did voice some caveats on the figures, suggesting they overstated the strength of the economy just as weather-hit numbers in February exaggerated its weakness.

Much of the rise in retail sales was due to a steep 5.3 percent climb in auto sales, a sector that has been exceptionally volatile for months as car makers like GM and Ford launched incentive scheme after incentive scheme to win market share. Americans' appetite for foreign goods was the single biggest drag on growth in the last quarter of 2002, but now trade appears to be adding to GDP. (Reuters)