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The Commerce Department said on Monday consumer spending increased 0.8 percent on strong demand for motor vehicles, after slipping 0.1 percent in June.

Economists had expected spending, which accounts for about 70 percent of U.S. economic activity, to rise 0.5 percent.

When adjusted for inflation, spending rose 0.5 percent last month, the largest gain since a matching increase in December 2009, after being flat in June.

The data was the latest to suggest the economy started the third quarter with some strength after growth almost stalled in the first half of the year.

It also offered hope that output would continue to expand, though at a moderate pace. However, the risks of a new recession have risen following a sharp drop in stock prices and the erosion of consumer sentiment.

"If anybody was concerned about this recession risk people were taking about, this personal spending number seems to be another point against that recession argument," said Jeffrey Greenberg, an economist at Nomura Securities in New York. "It seems at least through July, the economy was not too poor."

U.S. stock index futures held onto earlier gains after the data, while U.S. Treasuries prices added to losses. The dollar held steady versus the euro and maintained slight gains versus the yen.

Industrial production, retail sales and employment data have so far been consistent with a slow economic growth scenario rather than an outright contraction in output.

Consumer spending braked sharply to a 0.4 percent annual pace in the second quarter after advancing 2.1 percent in the first three months of the year.

The overall economy grew at a 1 percent pace in the second quarter after expanding only 0.4 percent in the prior quarter.

Real spending on durable goods increased 2 percent last month, likely reflecting a pick-up in motor vehicle sales as the shortage of autos caused by the supply disruptions from Japan eased.

Overall spending in July was lifted by a 0.3 percent rise in income as employers stepped-up hiring. Income rose 0.2 percent in June and economists had expected a 0.3 percent increase last month.

Disposable income increased 0.3 percent, but when adjusted for inflation fell 0.1 percent -- the first decline since September.

With spending outstripping real disposable income, savings fell to an annual rate of $582.8 billion from $638.6 billion in June.

The report also showed inflation pressures remain elevated. The personal consumption expenditures price index, or PCE, rose 0.4 percent after slipping 0.1 percent in June.

Compared to July last year, the index was up 2.8 percent, the largest increase since October 2008, after advancing 2.6 percent in June.

The core PCE index -- excluding food and energy - rose 0.2 percent for the second straight month.

The core index, which is closely watched by Federal Reserve officials, increased 1.6 percent in the 12 months through July, the largest increase since May 2010, after rising 1.4 percent in June. The Fed would like to see it close to 2 percent.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)

The New York Stock Exchange, the Nasdaq Stock Market and the alternative BATS venue said they will start the week as usual. IntercontinentalExchange said Monday openings for some U.S. futures products will be delayed by one hour.

Subway service resumed at 6 a.m. on Monday, althoughMetro-North commuter rail service was still closed, stranding many who normally commute in from Connecticut and New York suburbs. So the city suspended for now, the question remains: How light will staffing be on Wall Street?

The decision to open the market was made early Sunday afternoon after regulators, exchange officials and others met to discuss the storm and market operations. The U.S. bond market will also operate as normal on Monday, the Securities Industry and Financial Markets Association said.

New York City regained limited bus service on Sunday evening and the PATH rail line that links New Jersey and Manhattan reopened early Monday.

Big trading firms Citigroup and Knight Capital both said they are ready to go Monday morning.

But a Bank of America Corp spokeswoman said the bank has not made a final determination on whether its operations will be open normally on Monday.

The storm has had little effect on the bank's downtown operations, but Bank of America was waiting word from New York city officials on when public transit will reopen.

"Transit is the big question right now," she said.

The NYSE and broader U.S. marketplace are mostly automated, running quietly out of powerful data centers in New Jersey and elsewhere. Electronic trading is expected to function normally on Monday. But without full staffing, volume will take a hit.

"This is a slow week anyway, and if anything this will just result in lessened volume," said Randy Billhardt, head of institutional sales and trading at MLV & Co in New York.

Hurricane Irene battered New York with heavy winds and driving rain on Sunday, knocking out power for some and flooding some of lower Manhattan's deserted streets, including in the Wall Street district.

Irene was downgraded to a tropical storm on Sunday morning as it sped northward but was still sending waves crashing onto shorelines and flooding coastal areas.

There was about a foot of water in the streets of the South Street Seaport in downtown Manhattan, although there was less damage than many had feared.

BACKUP PLANS

All of Nasdaq's trading members appeared to be ready to go for Monday, said Eric Noll, the exchange's executive vice president of transaction services.

Knight Capital Group, the top trader of NYSE-listed shares with 16.2 percent market share, said it would be fully operational.

"Even in the event of a shutdown of our Jersey City campus -- if that were to occur -- we have redundancy built into our multiple trading desks," Peter Kenny, the firm's Jersey City-based managing director, said in an email. "Our trading desk in Purchase, New York would act as our principle desk as Jersey City does on a day-to-day basis."

"Our sales coverage and technology -- access to market -- will not be compromised on any level," he said.

The New York Mercantile Exchange (NYMEX), a few blocks from the NYSE, also plans at this time to open on Monday, parent CME Group Inc said on Sunday.

The NYSE trading floor now handles a fraction of the buy and sell orders it did five years ago, when about 3,000 brokers, specialists and others worked there.

There are now about 1,000 on the floor, and Lou Pastina, executive vice president of NYSE operations, estimated the Big Board would need half of them to open safely on Monday. Floor specialists are still important, particularly at the open and close of markets, when orders pile up.

Wall Street's biggest firms also said they weathered the storm well. Citigroup spokeswoman Danielle Romero-Apsilos said the bank's downtown buildings on Greenwich Street, which house its investment bank and other institutional client businesses, are fully functional, and employees can return when the city lifts its evacuation order for lower Manhattan.

The bank is looking at transport options for employees for Monday, pending updates on what will be happening with mass transit.

For staffers unable to report to their normal offices, Citi has alternative sites ready, and also offers employees remote access to company systems.

(Writing by Chris Sanders; Additional reporting by Ryan Vlastelica, David Sheppard, Joe Rauch, Dan Wilchins and Soyoung Kim; Editing by Braden Reddall and James Dalgleish)

If politicians ignore their pleas -- including a blunt call from International Monetary Fund chief Christine Lagarde to "act now" -- the slowdown in world growth and debt turmoil in Europe could morph into a deeper crisis, top monetary officials and economists warned at an annual retreat here.

"I hope they listen," said Bank of Israel Governor Stanley Fischer.

Alarm over political deadlock was as obvious a backdrop to the annual meeting of policymakers in the wilds of Wyoming as the thunderstorms that rolled over the nearby Grand Teton peaks and dumped rain on the Jackson Lake Lodge.

"The governance right now is not going through a very brilliant moment, I have to say, neither in Europe nor in the United States," Angel Gurria, who heads the multi-nation Organization for Economic Co-operation and Development, told Reuters.

"The signals that are coming out of the short-term discussions is, 'We can't even agree on about the time of the day, even if there's a big clock telling us what the time of the day is.'"

In the United States, the political impasse has thwarted moves to tame massive budget deficits which brought the nation to the edge of a debt default and cost the United States its coveted AAA credit rating from Standard & Poor's.

In Europe, leaders are fighting over who should pay for the sovereign debt crisis in the euro zone, which has a unified regime for monetary policy but whose member nations run their own budget policies.

PHONE CALLS, SPEECHES

Lagarde, whose appearance on Saturday was a late addition and reflected her sense of urgency, delivered a hard-hitting pitch against braking spending too fast as nations struggle to rein in long-term budget deficits.

She was far from alone.

The Fed has slashed U.S. interest rates to near zero and bought $2.3 trillion in long-term securities in an effort to kick-start the recovery. With monetary policy stretched to its limits, fiscal policy is now key, Fed Chairman Ben Bernanke suggested.

"Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not as a consequence disregard the fragility of the current economic recovery," he said on Friday.

"Fortunately the two goals of achieving fiscal sustainability -- which is the result of responsible policies set in place for the longer term -- and avoiding the creation of fiscal headwinds for the current recovery are not incompatible."

Bernanke said battling long-term joblessness in the United States must be a top priority, and he called on the U.S. government to put a floor under the sagging housing market, remarks that Lagarde echoed forcefully on Saturday.

Bernanke's speech was "the shot across the bow of the government saying, 'don't keep layering expectations on the Federal Reserve, guys, you have a job to do,'" Columbia Business School Dean Glenn Hubbard said in an interview with Reuters Insider.

"The Fed is simply saying, 'We are monitoring the situation very carefully but would encourage the government, both parties, to get their act together and pass a long-term fiscal strengthening package and then perhaps short-term stimulus.

The calls from the world's economic policy elite may give some political cover to President Barack Obama, who faces a tough re-election fight next year with the U.S. unemployment rate stuck above 9 percent.

Obama is preparing for a speech after the September 5 Labor Day holiday in which he is expected to lay out proposals to boost hiring. He is reaching out to other world leaders too.

On Saturday, Obama spoke with German Chancellor Angela Merkel, and the White House said the two leaders vowed to act to shore up a global recovery that now looks at risk.

A day earlier Obama had called Lagarde to talk about fiscal policy. They agreed that the world economy needs further steps to boost growth.

Obama's potential presidential challengers, including leading Republican candidate Mitt Romney, have repeatedly blamed Obama's policies for impeding growth.

The U.S. economy grew less than 1 percent in the first half of the year and has yet to return to its pre-recession size.

EUROPE'S BANKS FACE SCRUTINY

In Europe, the biggest threat is a spreading sovereign debt crisis, and richer euro zone nations, chief among them Germany, have shown a hesitancy in picking up the tab for nations on the debt-strapped periphery.

Stress tests last month exposed the degree to which European banks are exposed to Greek and other shaky government debt, and lenders are balking at extending credit.

Lagarde and European Central Bank President Jean-Claude Trichet both said strengthening bank balance sheets is crucial.

"Although there is clarity on required policies, the uncertainty created by the political stances in both Europe and the United States poses some serious risks," Cornell University Professor Eswar Prasad said.

"Getting the policy balance right is tricky in itself; this adds a layer of uncertainty that will make it that much harder," Prasad said.

(Writing by Ann Saphir; Editing by Braden Reddall)