NEW YORK (CNN/Money) - A closely watched measure of U.S. consumer confidence shrank dramatically in July, according to published reports Friday, as non-stop news about corporate malfeasance, falling stock prices and a weak labor market put pressure on a pillar of economic strength.

But a separate government report said retail sales rose in June, beating Wall Street expectations, following a sluggish May.

The University of Michigan consumer sentiment index fell to 86.5 in July from in 92.4 in June, according to a Reuters report. Economists, on average, expected a reading of 93, according to Briefing.com. The report is available only to paying subscribers.

More ominously, the survey's expectations index, measuring consumer feelings about the future, plunged to 78.5 from 87.9 in June, Reuters said. The current conditions index fell to 99 in July from 99.5 in June.

"These numbers confirm the notion that consumer spending, which has been so resilient, is under some threat," said Anthony Chan, chief economist at Banc One Investment Advisors. "With investor sentiment so weak and the labor market continuing to deteriorate, consumer confidence had only one way to go -- lower."

Separately, the Commerce Department said retail sales rose 1.1 percent last month to $299.5 billion after a revised 1.1 percent drop in May. Excluding volatile automobile sales, retail sales rose 0.4 percent, compared with a drop of 0.4 percent in May. Economists surveyed by Briefing.com expected sales to rise 0.7 percent and "core" sales to rise 0.5 percent.

"We had expected a snap-back in consumer spending after a decline in May, and that's what these numbers showed," Lynn Reaser, senior market strategist at Banc of America Capital Management in St. Louis, told Reuters. "Consumers appeared to be optimistic in their spending, despite the stock market and the ongoing corporate frauds and malfeasance."

U.S. stock prices were mixed in early trading following the Michigan sentiment index report, with the Dow turning negative and the Nasdaq barely clinging to earlier gains. Treasury bond prices fell.

Consumer spending is critical to economists and policy makers because it makes up about two-thirds of the total U.S. economy. The Federal Reserve cut its target for short-term interest rates 11 times in 2001 and has kept rates low this year with consumers in mind -- lower rates make borrowing easier and spur spending.

With unemployment rising, stock markets in turmoil and corporate accounting scandals dominating the news -- all of which could weigh on consumer sentiment -- the Fed is unlikely to raise rates any time soon, especially since inflation seems to be in check.

"This rules out any Fed action until November -- or perhaps until next year," Chan of Banc One Investment Advisors said.

Still, Chan said he suspected that the July Michigan sentiment number -- which will be revised later this month -- overstated consumer fears. If the stock market stabilizes, he said, sentiment could stabilize, too.

Consumers certainly spent with more confidence in June, though the big gain in retail sales came mainly from a 3.4 percent jump in sales of automobiles and auto parts, following a 3.2-percent decline in May. Sales at gas stations fell just 0.1 percent after a 2.4 percent drop in May.

Sales of clothing and accessories jumped 2 percent, following a 2.1 percent drop in May.