NEW YORK (CNN/Money) - U.S. consumer confidence plunged to its lowest level in nearly nine years in October - posting its most dramatic decline since the Sept. 11 terrorist attacks -- as a pillar of the U.S. economy showed severe signs of strain.

The Conference Board, a business research group based in New York, said its closely watched index of consumer confidence tumbled to 79.4 from a revised 93.7 in September. It was the fifth straight decline for the index and came in well below the reading of 90 that economists had expected on average, according to a Briefing.com survey.

It also was the lowest reading since November 1993 and the biggest month-to-month decline since a 17-point drop from August to September of last year, after the terrorist attacks.

"A weak labor market, the threat of military action in Iraq and a prolonged decline in the financial markets have clearly dampened both consumers' confidence and their expectations for the near future," Lynn Franco, director of the Conference Board's Consumer Research Center, said. "The outlook for the holiday retail season is now fairly bleak."

Economists said the report -- coupled with other recent data showing weakness in manufacturing and the job market as well as sluggish retail sales -- make it much more likely that the Federal Reserve will cut interest rates before the year is out, perhaps as soon as next week.

"We think confidence will rebound next month, but in the meantime the odds surely now favor a Fed ease next week," said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd.

Consumer confidence plunged in October to the lowest level in nine years. CNNfn's Kathleen Hays reports. Play video (QuickTime, Real or Windows Media)

U.S. stock prices fell sharply after the report while Treasury bond prices jumped, as traders bet that corporate profits would be hurt and interest rates would fall. Bond prices and yields move in opposite directions.

Consumer confidence is closely watched by Wall Street and economists since consumer spending fuels about two-thirds of the U.S. economy. Consumer spending has been remarkably resilient despite the recession that began in March 2001, nearly 1.8 million job cuts, last year's attacks, a wave of corporate accounting scandals and falling stock prices.

Many economists are somewhat skeptical of confidence measures, saying they don't always predict the true course of consumer spending. But there's little question that retail sales and other data show consumers have reined in their spending in recent months.

"It's clear the consumer has progressively turned more cautious and conservative," said Wayne Ayers, chief economist at Fleet Boston Financial and a former economist at the Federal Reserve. "Given that, and given that business capital spending has yet to come back, how long can this recovery keep on going? These numbers certainly make that a legitimate question."

Policy makers at the Fed, the nation's central bank, are scheduled to meet next Wednesday to discuss their target for short-term interest rates, which they manipulate to speed up or slow down economic activity.

After leaving rates at 40-year lows all year, many economists expect the Fed to cut rates again this year in response to recent signs of economic weakness. Tuesday's confidence report did little to dispel that idea.

The key to the size and timing of the next Fed move could well be Friday's report on the October unemployment rate. Economists, on average, expect unemployment to creep back up to 5.8 percent from 5.6 percent in September and expect no job growth after a loss of 43,000 jobs in September, according to Briefing.com.

A surprisingly bad report on unemployment or payrolls could well encourage the Fed to cut rates in a bid to keep consumers from reining in purchases dramatically.

Consumer spending, driven by automobile sales, was strong in the third quarter and likely will help push gross domestic product up nearly 4 percent in the third quarter.

But the economic strength hasn't translated into new jobs, and debt-laden consumers have responded by putting off purchases and trying to get their financial houses in order. As a result, most economists see a slowdown in GDP, the broadest measure of the nation's economy, in the fourth quarter.

"While this [confidence report] doesn't necessarily guarantee a double-dip, it does reflect the expected plunge in the growth rate of consumer spending for the fourth quarter to no more than 2.5 percent after a possible gain of 4 percent in the third quarter of 2002," said Anthony Chan, chief economist at Banc One Investment Advisors.