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The core consumer price index was flat last month, the Labor Department said on Friday, defying financial market expectations of a 0.1 percent gain. The core CPI, which excludes food and energy prices, rose 0.1 percent in July.

While the report strengthened the Federal Reserve's bias toward further monetary easing, the data was not so weak that the U.S. central bank is expected to announce new steps to ease monetary policy when it meets on Tuesday to assess the economy, analysts said.

"It keeps alive the possibility that the trend could turn negative over the next year or two, but the numbers are not weak enough to encourage them to start a new purchasing program next week," said Jim O'Sullivan, chief economist at MF Global in New York.

The overall CPI rose 0.3 percent, lifted by higher food and energy costs, after a similar gain in July. August's rise was a touch above expectations of a 0.2 percent increase.

Another report showed consumer sentiment unexpectedly worsened in early September to its weakest level in more than a year.

The Thomson Reuters/University of Michigan's preliminary September reading on consumer sentiment came in at 66.6, down from 68.9 in August.

U.S. government bond prices rose as some investors viewed the flat core reading as a sign deflation remained a threat to an economy struggling to recover from its worst recession since the 1930s.

Wall Street stocks traded flat, while the dollar rose against the euro.

With sluggish domestic demand expected to keep inflation pressures tame, many analysts believe the Fed will resume large-scale asset purchases in coming months to drive long-term interest rates lower to spur the economy and keep deflation risks at bay.

The U.S. central bank already has cut overnight interest rates to near zero and pumped more than $1.7 trillion into the economy through purchases of Treasury and mortgage-related debt.

"We expect the Fed to formalize the bias toward easing, but they will probably wait until November to initiate balance sheet expansion," said Yelena Shulyatyeva, an economist at BNP Paribas in New York.

Data on Thursday showed prices paid at the farm and factory gate increased 0.4 percent in August.

In the 12 months to August, the CPI rose 1.1 percent after a 1.2 percent increase the prior month. The increase was in line with market expectations.

Last month energy prices rose 2.3 percent after rising 2.6 percent in July, while gasoline prices were up 3.9 percent. Food costs rebounded 0.2 percent from July's 0.1 percent drop.

The monthly core inflation rate was dampened by housing costs, which were flat, and weak prices for apparel.

However, new vehicle prices increased 0.3 percent, the largest gain since November, after rising 0.1 percent in July. Prices for used cars and trucks increased 0.7 percent after rising 0.8 percent the prior month.

In the 12 months to August, the core inflation rate rose 0.9 percent after a similar increase in July. Markets expected an increase of 1.0 percent.

(Reporting by Lucia Mutikani; Additional reporting by Richard Leong in New York; Editing by Andrea Ricci and Dan Grebler)