WASHINGTON, Aug 14 (Reuters) - U.S. retail sales

unexpectedly fell in July after recent strong gains that were

fueled by large tax refunds, but consumer spending is likely to

remain supported by rising wealth from the stock market even as

households are increasingly sensitive to higher prices.

Retail sales dropped 0.6% last month after an unrevised 0.2%

gain in June, the Commerce Department's Census Bureau said on

Friday. Economists polled by Reuters had forecast retail sales,

which are mostly goods and are not adjusted for inflation,

edging up 0.1%. Estimates ranged from a 0.5% drop to a 0.7%

increase.

Generous tax refunds this year helped to soften the blow

from higher gasoline prices stemming from the Middle East

conflict, resulting in robust consumer spending in the second

quarter. Those refunds have been exhausted, economists said.

Last month's decline in retail sales was also payback after

Amazon pulled forward its Prime Day event to June from July,

with other retailers offering competing promotions. Gasoline

prices also fell last month, weighing on receipts at services

stations. Auto manufacturers reported a decline in unit sales.

With a stock market rally boosting household wealth, economists

believed that the weakness in retail sales would be temporary.

The S&P 500 index has risen 14% this year.

Economists at PNC Financial said an analysis of bank data

showed households in July appeared more sensitive to

rising gasoline prices than they were earlier this year,

creating what they said was a less supportive backdrop for

spending in the second half of the year. But they said it was

"difficult to envision a scenario where spending truly rolls

over," given the rise in household wealth.

"We see increasing evidence of upper-income and older

households cashing in on wealth gains to support spending," they

wrote in a note.

Retail sales excluding automobiles, gasoline, building materials

and food services fell 0.4% last month after a downwardly

revised 0.4% increase in June. Economists had forecast these

so-called core retail sales, which correspond most closely with

the consumer spending component of gross domestic product,

rising 0.3% after a previously reported 0.5% increase in June.

Consumer spending, which accounts for more than two-thirds

of the economy, increased at a 3.2% annualized rate in the

second quarter. The economy grew at a 1.5% pace last quarter.