The Commerce Department reported Wednesday retail sales decreased 1.2 percent last month, nearly double the 0.7 percent drop that had been expected. It was the biggest decline since retail sales fell by 1.4 percent in August 2005.

The bigger-than-expected decline significantly increased the risks of a recession because consumer spending is two-thirds of total economic activity.

The weakness was led by a 3.8 percent drop in auto sales. Sales dropped below 1 million units as consumers struggled to find financing.

Retail sales have now fallen for three consecutive months, the first time that has occurred on government records that go back to 1992. Economists had expected sales to be down in September as a flood of bad news about the financial system and rising unemployment increased consumers' worries.

Many analysts believe the overall economy, as measured by the gross domestic product, is slipping into a recession, triggered by a steep slump in housing and the severe credit crisis.

Even excluding auto sales, retail sales showed widespread weakness, falling by 0.6 percent or double the decline outside of autos that had been expected.

"The consumer shut up shop even before the markets got crushed and that is not good news for the economy," said Joel Naroff, chief economist at Naroff Economic Advisors. "What is ominous is that the declines in spending were broad based."

Sales at department stores fell by 1.5 percent following an even bigger 1.6 percent drop in July. Sales at furniture stores fell by 2.3 percent. Sales at appliance stores slid 1.5 percent.

In other economic news, the Labor Department reported that wholesale prices fell for a second straight month, declining by 0.4 percent, thanks to a big drop in energy costs. However, core wholesale prices, which exclude food and energy, rose by 0.4 percent, double what economists had been expecting.

Federal Reserve policymakers are counting on the economic slowdown to dampen inflation pressures and give them more room to cut interest rates if needed to keep the financial crisis from pushing the country into a deep downturn. The central bank last week cut a key rate by a half-point at an emergency meeting, coordinating the move with other major economies.

In a third report, the Commerce Department said businesses increased their inventories by 0.3 percent in August _ the smallest advance in five months. The increase was below the 0.5 percent rise that economists had expected and sharply lower than the 1.1 percent jump in July.

Economists are watching to see whether business confidence begins to falter as the economy weakens. Business plans on inventory growth and investment spending are key factors influencing economic activity.

Analysts said the slowdown in inventory growth could also be reflecting the serious problems in the market for commercial paper, where businesses obtain short-term loans to fund their day-to-day operations such as buying inventories. That market has frozen up in recent months as banks have grown concerned about the risks of bad loans.

In one of many emergency measures implemented by the government during the current credit crisis, the Federal Reserve has announced that it will start a program later this month to support the commercial paper market in an effort to get those loans back to more normal levels.