Retail sales unexpectedly fell 0.6 per cent last month, while the ranks of workers remaining on state unemployment benefit rolls hit the highest level in nearly two and a half years in the final week of February, government reports on Thursday showed.

Now, the growing credit crunch that has wreaked havoc on Wall Street is settling in on Main Street. On this front, US home foreclosure filings in February edged down from January but were a whopping 60 per cent higher than a year earlier, real estate data firm RealtyTrac said on Thursday.

The surge in foreclosures from a year earlier indicated that the cycle has yet to hit its peak, the firm said.

Consumers, who fuel roughly two-thirds of US economic growth, held back on spending in a wide range of areas amid surging food and energy costs and a decline in wealth as home values tumbled.

'This is a downward spiral consistent with a recession,' said Mr Kurt Karl, chief economist at Swiss RE in New York.

'Because consumer prices are so elevated, we're seeing the hits on the consumer. They can't finance it and we've got a credit market crunch.'

Many Wall Street firms believe the economy is already in recession. The chairman and chief executive of JPMorgan, Mr Jamie Dimon, on Wednesday warned that further deterioration in the housing market, which is suffering the worst performance since the Great Depression, is expected and will be unprecedented.

'Financial conditions are getting more extreme,' Mr Dimon said, adding that more is needed from the Federal Reserve and the Bush administration to ease the growing financial crisis.

The dismal data left Wall Street analysts all but certain the Fed will reduce interest rates by 75 basis points by Tuesday, when the US central bank's next policy meeting is scheduled.

The expectation of lower interest rates helped keep the dollar on its downward spiral, driving it to its lowest level against the yen in more than a decade and a record low against the euro.

US stocks reversed losses in afternoon trade after Standard & Poor's said the end to subprime-related write-downs is in sight. The Dow Jones industrial average closed up 0.29 per cent at 12,145.74 points.

US government debt prices retreated after a top Democratic congressman, Representative Barney Frank of Massachusetts, unveiled a bill aimed at getting the government involved in buying distressed mortgages.

Sales weaker than expected
Economists were expecting a 0.2 per cent rise in retail sales after an upwardly revised 0.4 per cent gain in January.

Excluding cars, sales fell 0.2 per cent in February, a weaker reading than the 0.2 per cent gain economists had forecast.

The White House was quick to try and allay concerns among consumers about the economy's prospects.

'The big message is that you can have confidence in the long-term future of our economy. We are going to see the benefits of the tax release and the economic growth package coming on line,' said White House spokesman Tony Fratto.

US regulators, in a review of capital markets released on Thursday, recommended higher capital requirements for investment houses and better disclosure of risky investments.

The report also outlined new consumer protections for the mortgage lending industry.

The latest government report on consumer spending added evidence that housing and credit troubles have spread more broadly into the economy.

Excluding gasoline, building materials and autos, spending was flat after a 0.3 per cent gain in January, showing a damaged economy well beyond the weakened housing and credit markets.

'The slowdown that we know is happening in the banks has manifested itself on Main Street,' said Mr Joe Francomano, vice-president for foreign exchange at Erste Bank in New York.

Labour market weakens
A separate report showed the US labour market was still weakening.

The number of US workers applying for unemployment benefits was unchanged last week at 353,000, slightly below expectations. However, the number of unemployed remaining on jobless aid at the end of February was the highest in nearly two and a half years, the Labor Department said.

While consumers have begun cutting back on spending, it was a somewhat different story at businesses.

Stockpiles of goods at US businesses rose in January by the biggest amount since 2006 and sales experienced their largest increase in nearly a year, a separate Commerce Department report showed on Thursday.

The stock-to-sales ratio, which measures how long it would take to empty inventories at the current pace, dropped to 1.25 months' worth from 1.26 months in December, matching a record low set in November. -- REUTERS