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The Commerce Department said on Friday consumer spending increased 0.6 percent, matching expectations, after a 0.2 percent gain in August. Consumer spending accounts for about 70 percent of U.S. economic activity.

With income edging up 0.1 percent last month, spending was at the expense of saving, which dropped to an annual rate of $419.8 billion, the lowest level since August 2009, from $479.1 billion in August.

The saving rate, the percentage of disposable income socked away, fell to 3.6 percent, the slowest since December 2007, from 4.1 percent in August.

Income fell 0.1 percent in August and economists had expected a 0.3 percent increase in September.

"Very weak income, but very solid consumption even though consumer confidence is in recession. So that's good news for the economy," said Kurt Karl, chief U.S. economist at Swiss Re in New York. "(But) it's hard to sustain without more income growth."

A separate report from the Labor Department showed wages and salaries expanded 0.3 percent in the third quarter -- the smallest rise in a year -- after gaining 0.4 percent pace in the prior quarter.

U.S. Treasuries prices held steady at higher levels after the data. Stock index futures were lower after a big rally on Thursday, while the euro extended a decline against the dollar.

In September, inflation-adjusted disposable income slipped 0.1 percent, declining for a third straight month.

Sturdy consumer spending contributed to gross domestic product growing at a 2.5 percent annual pace in the third quarter, the fastest rate in a year, after an anemic 1.3 percent rate in the second quarter. Much of the spending data was included in Thursday's GDP report.

But given that income is not driving spending, the economy could lose some of its new found momentum. Consumer spending grew at a 2.4 percent pace in the last quarter, the fastest in nearly a year.

Stubbornly high unemployment, characterized by a jobless rate that has been stuck above 9 percent for five consecutive months, is restraining income growth. Last month, wages and salaries rose 0.3 percent after dipping 0.1 percent in August.

But subsiding inflation pressures should offer households some relief. A price index for personal spending rose at a 0.2 percent rate last month, slowing from August's 0.3 percent pace. In the 12 months through September, the PCE index was up 2.9 percent after rising by the same margin in August.

A core inflation measure, which strips out food and energy costs, was flat last month after increasing 0.2 percent in August. In the 12 months through September, core PCE rose 1.6 percent after increasing 1.7 percent in August.

The Federal Reserve would like this measure close to 2 percent.

(Reporting by Lucia Mutikani and Jason Lange; Editing by Neil Stempleman)

Klaus Regling, chief executive of the European Financial Stability Facility (EFSF), was in Beijing for talks with Chinese officials a day after euro zone leaders struck a last-minute accord on the two-year-old debt crisis.

European leaders are now under pressure to finalize the details of their plan to slash Greece's debt burden and strengthen their rescue fund.

After their summit in Brussels, governments announced an agreement under which private banks and insurers would accept 50 percent losses on their Greek debt holdings in the latest bid to cut Athens' debt load to sustainable levels.

Regling said the bailout deal with Greece was an exceptional case that he did not believe would have to be repeated for other nations.

Many in financial markets are concerned that the fund is not big enough to cope if major economies Italy and Spain are drawn deeper into the crisis. Italy's borrowing costs hit new euro-era highs at a bond auction Friday.

"We all know China has a particular need to invest surpluses," Regling told a Beijing news conference Friday, referring to the country's $3.2 trillion of foreign exchange reserves, the world's biggest.

France said investment by China would inspire confidence.

"The reality is that China is the third largest shareholder in the International Monetary Fund, and if China via the IMF wants to participate - not by saving Greece or the euro - but by participating in investment, that is a gesture of confidence," French Finance Minister Francois Baroin said.

"What is happening in Europe and creating instability is that public and private investors are pulling out," he told RMC radio.

Economists polled by Reuters Thursday were split down the middle over whether the writedown was big enough, with 24 of 47 saying it wasn't and the remainder saying it was.

Reached after more than eight hours of hard-nosed negotiations between bankers, heads of state and the IMF, the deal also foresees a recapitalization of hard-hit European banks and a leveraging of the EFSF, to give it firepower of 1.0 trillion euros ($1.4 trillion).

Global stocks were expected to record their best week in over two years Friday, bolstered by the Brussels deal, while the euro held just below a seven-week high. Shrugging off the lack of detail in Thursday's anti-crisis measures in Europe, shares extended the previous session's sharp rally.

The FTSEurofirst 300 index of leading European shares was up 0.2 percent at 1,021.67 points in early trade.

Switzerland said it was looking at participating in the EU bailout fund via a special investment vehicle, although the idea could run into domestic opposition given the country's euroskeptical nature.

Norway, however, whose $564 billion oil fund is Europe's biggest investor in equities, said it had less than 100 million euros in EFSF investments.

Key aspects of the eurozone deal deal, including the mechanics of boosting the EFSF and providing Greek debt relief, could take weeks or even months to pin down, raising the risk of the plan unraveling as the last one did.

Three months ago, euro zone leaders unveiled another agreement that was meant to draw a line under the debt woes that threaten to tear apart the 12-year old currency bloc.

In a matter of weeks they realized it was inadequate given the depth of Greece's economic problems and the vulnerability of European banks.

The new deal aims to address these holes.

"ABSOLUTELY SUSTAINABLE"

Under it, the private sector agreed to voluntarily accept a nominal 50 percent cut in its bond investments to reduce Greece's debt burden by 100 billion euros, cutting its debts to 120 percent of gross domestic product by 2020, from 160 percent now.

The euro zone will offer 30 billion euros in "credit enhancements" or sweeteners to the private sector to get them on board. The aim is to complete negotiations on the package by the end of the year, so Greece has a full, second financial aid program in place before 2012.

The value of that package, EU sources said, would be 130 billion euros -- up from 109 billion euros in the July deal.

"The debt is absolutely sustainable now," Greek Prime Minister George Papandreou said.

In a bid to convince markets that they can prevent larger countries like Italy and Spain from being swept up by the crisis, euro zone leaders also agreed to scale up the EFSF, the 440 billion euro bailout fund they created in May 2010 and have already used to provide aid to Ireland, Portugal and Greece.

Around 250 billion euros remaining in the fund will be leveraged 4-5 times, producing a headline figure of around 1.0 trillion euros.

The EFSF will be leveraged in two ways, either by offering insurance, or first-loss guarantees, to purchasers of euro zone debt in the primary market, or via a special purpose investment vehicle that will be set up in the coming weeks and which is aimed at attracting investment from China and Brazil.

The methods could be combined, giving the EFSF greater flexibility, the euro zone leaders said.

But EU finance ministers are not expected to agree on the nitty-gritty elements of how the scaled up EFSF will work until some time in November, with the exact date not fixed.

Another question mark is Italian Prime Minister Silvio Berlusconi's commitment to implementing reforms seen as crucial for restoring confidence in the bloc's third largest economy.

Dogged by scandals, Berlusconi has promised to raise the retirement age to 67 by 2026 and attempt other reforms, but the EU is reserving judgment after repeated backsliding from Rome in recent months.

SARKOZY TALKS TO HU

French President Nicolas Sarkozy said he had spoken to Chinese President Hu Jintao by telephone Thursday and that Hu was relieved Europe had announced a deal to tackle a debt crisis that otherwise could have taken down the entire world economy and not just the economy of the euro zone.

He also defended the idea of Chinese investment in Europe's anti-contagion fund, donning the hat of euro salesman.

"China has a major role to play. China must deploy more resources to stimulate the world economy: If they decide to invest in the euro rather than the dollar, why reject that? "

"Why not accept that the Chinese place their trust in the euro zone?"

"China hopes all these measures will help stabilize the European financial market and conquer the current difficulties and promote the economic recovery and development," Hu said, according to China's state television.

($1 = 0.724 Euros)

(Writing by Giles Elgood; Editing by Ruth Pitchford)

Chevron, the second-largest U.S. oil company, is expected to show a sharp increase in profit in its quarterly review, boosted by a $500 million gain on the sale of its Welsh refinery and British and Irish marketing assets. Its profit is expected to jump to $3.46 per share from $1.87 per share.

Merck, the No. 2 U.S. drugmaker, is likely to post a profit of 91 cents per share, up from 85 cents a year ago. Other companies announcing results included Newmont Mining, Whirlpool and Biogen.

The Commerce Department releases at 8:30 a.m. EDT September personal income and consumption data. Economists expect a 0.3 percent rise in income and a 0.6 percent increase in spending. In August, income fell 0.1 percent and spending was up 0.2 percent.

The Labor Department issues at 8:30 a.m. EDT the Employment Cost Index for Q3. Economists expect a rise of 0.6 percent versus a 0.7 percent increase in Q2.

Exxon Mobil Corp awarded two engineering contracts to build floating storage and offloading facilities at the Banyu Urip oilfield and said this will lead to full production of 165,000 barrels per day at its Cepu block in three years.

At 1355 GMT, Thomson Reuters/University of Michigan Surveys of Consumers release final October consumer sentiment index. Economists expect a reading of 58.0 compared with 57.5 in the preliminary October report.

Economic Cycle Research Institute releases at 10:30 a.m. EDT its weekly index of economic activity. In the prior week the index read 120.4.

Samsung Electronics Co overtook Apple as the world's top smartphone maker in the July-September period with a 44 percent jump in shipments, and forecast strong sales in the current quarter.

Brocade Communications System Inc may be back to looking at prospective buyers, the Wall Street Journal said, citing people familiar with the matter.

Some customers are moving money away from struggling futures brokerage MF Global Holdings Ltd, according to hedge funds, rivals and analysts, though the extent of the outflows is unclear.

Infospace shares fell 9 percent in late trade on Thursday after the company announced results. However, Deckers Outdoor Corp rose 3.3 percent, Advanced Micro Devices Inc climbed 6.3 percent and Baidu Inc added 5.5 percent after results.

Japan's Nikkei average rose 1.4 percent while European shares were up 0.2 percent after strong gains in the previous session, with investors remaining positive by a deal struck by euro zone leaders to help end the bloc's two-year-old debt crisis.

President Barack Obama said on Thursday the deal struck by euro zone leaders had calmed global markets and it was now important that the countries follow through on implementation of the agreement.

The Dow Jones industrial average was up 339.51 points, or 2.86 percent, at 12,208.55. The Standard & Poor's 500 Index was up 42.59 points, or 3.43 percent, at 1,284.59. The Nasdaq Composite Index was up 87.96 points, or 3.32 percent, at 2,738.63.

(Reporting by Atul Prakash; Editing by David Holmes)

The dollar steadied after nursing heavy losses, having suffered its biggest decline in more than two years against a basket of major currencies, after a European debt deal sparked a massive relief rally.

The deal in Europe calls for private banks and insurers to take 50 percent losses on their Greek debt as well as agreements on recapitalization of hard-hit European banks and a leveraging of the bloc's rescue fund.

European shares climbed to a 12-week high and those in Wall Street jumped 3 percent, pushing the S&P 500 .SPX benchmark over its 200-day moving average for the first time since early-August.

Risk appetite was further supported by data showing the U.S. economy grew at its fastest pace in a year in the third quarter, a welcome respite for a financial system that seemed on the brink of a recession some weeks ago.

The MSCI Asia Pacific ex-Japan index .MIAPJ0000PUS rose 1.4 percent and is up nearly 10 percent so far this week.

Japan's Nikkei .N225 was up 1.3 percent despite the yen hitting record highs against the dollar for three days in a row.

The dollar index .DXY was up 0.2 percent after falling some 1.6 percent, the biggest one-day fall since May 2009.

The People's Bank of China set the yuan's central parity rate against the U.S. dollar at a record high of 6.3290 on Friday, the highest level since the revaluation in 2005.

In commodities markets, crude oil futures were off 0.5 percent after an over 4 percent rally on Thursday.

Shanghai copper futures rose 6 percent to its daily limit to 61,010 yuan a tonne.

Spot gold was little changed at $1,749.34 an ounce by 0120 GMT and was poised for its biggest weekly gain since January 2009.

(Reporting by Vikram Subhedar; Editing by Kavita Chandran)