WASHINGTON (Reuters) - U.S. retail sales rose more than expected in July, which could help to allay financial market fears of a sharp economic slowdown that were fanned by a jump in the unemployment rate.

Retail sales increased 1.0% last month after a downwardly revised 0.2% drop in June, the Commerce Department's Census Bureau said on Thursday.

Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, advancing 0.3% after previously being reported as unchanged.

Signs that demand is not collapsing could prompt financial markets to dial back expectations for a 50 basis points interest rate cut next month. The odds continue to favor a quarter-point rate reduction, with inflation rising mildly in July.

Consumers are maintaining spending by bargain hunting and trading down to lower-priced substitutes.

Retail sales excluding automobiles, gasoline, building materials and food services rose 0.3% last month after advancing by an unrevised 0.9% in June.

These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. The strong data put retail sales on a solid footing at the start of the third quarter, despite last month's marginal gain.