U.S. retail sales rise in February

Optimism about Friday's report was tempered by a slip in consumer confidence early this month. Worries about stubbornly high unemployment held back sentiment, even though the economy appears to be on the cusp of creating jobs.

"The manufacturing recovery is starting to broaden out to the key consumer area of the economy. Consumers are keeping up their end of the bargain to ensure the recovery from recession is a sustainable one," said Chris Rupkey of the Bank of Tokyo-Mitsubishi in New York.

Sales rose 0.3 percent, the Commerce Department said, as consumers bought an array of goods from necessities to luxury items. January sales, however, were revised down to a gain of 0.1 percent from the previously reported 0.5 percent rise.

Analysts had expected sales to slip 0.2 percent last month.

U.S. stocks initially rose on the retail sales data, but lost steam and major indexes turned flat on the surprise drop in consumer confidence. U.S. government debt prices rose, while the dollar gained against the yen.

The sales report was the latest in a series of data hinting at building underlying strength in an economic recovery that has been largely driven by government stimulus and a swing towards inventory building by businesses.

Officials from the Federal Reserve meet on Tuesday and are expected to hold overnight interest rates in a range of zero to 0.25 percent and maintain a pledge to keep them ultra-low for an "extended period" to foster a more robust recovery.

Stronger data, however, could spark a lively discussion at the meeting, as some officials have raised concerns about the inflationary impact of keeping rates too low for too long.

Treasury Secretary Timothy Geithner said on Friday the economy was gradually strengthening across the board, but cautioned it would take time to fully recover.