By Lucia Mutikani

WASHINGTON (Reuters) - Worries over high unemployment battered U.S. consumer confidence to a four-month trough in August, while spending rose modestly in July, indicating the economy faced a rocky road to recovery.

The Reuters/University of Michigan Surveys of Consumers said on Friday its final index of confidence for August fell to 65.7, the lowest since April, from 66.0 in July. However, sentiment improved from early this month. [nN28361969]

A separate report from the Commerce Department showed consumer spending edged up 0.2 percent in July, largely driven by the government's "cash-for-clunkers" program that fueled demand for autos, after increasing 0.6 percent in June.

Incomes, however, were flat after a steep 1.1 percent drop in June, underscoring the pressure on households still facing falling housing prices and rising unemployment.

"This tells me consumers are still in a rebuilding phase. It's clear to me that we cannot count on growth through next year as long as consumers are still on the ropes," said Christopher Low, chief economist at FTN Financial in New York.

U.S. stock indexes fell on the confidence data, which cast more doubt on the strength and sustainability of the economy's recovery from the worst recession in 70 years. <.N> Prices of U.S. government bonds, considered a safe-haven in the financial markets, rose.

Spending which accounts for about two-thirds of U.S. economic activity, fell at a 1 percent annual rate in the second quarter after a 0.6 percent gain in January-March period.

Still, analysts said the rise in July spending raised hopes that consumption would recover in the third quarter as an improvement in the economic outlook and slowdown in the pace of layoffs boost consumer sentiment and encourage households to spend more.

"That puts us in pretty good stead for an upturn in consumer spending in the third quarter," said David Resler, chief economist at Nomura Securities International in New York.

"We don't expect a big rise, but growth in the neighborhood of 1 percent or so in consumer spending will be an important element of an expected turnaround from decline to growth."

Personal income was flat in July, where analysts polled by Reuters had forecast a rise of 0.2 percent. Real disposable income edged down 0.1 percent in July.

However, private wage and salary disbursements increased $6.7 billion in July, the first gain since last August, after a $24.5 billion drop in June. The increase probably reflected the slowdown in layoffs during the month.

"The personal income number continues to reflect the anemic job market that we're facing in the U.S. We're still destroying jobs, not creating them, and that's going to pressure personal income for a while," said Craig Hester, chief executive officer at Hester Capital Management in Austin, Texas.

With disposable income declining, savings slipped to an annual rate of $458.5 billion. That took the saving rate to 4.2 percent from 4.5 percent in June, the department said.

Subdued demand is keeping a lid on inflation pressures, the report showed. A measure of inflation closely watched by the Federal Reserve, the year-on-year personal consumption expenditures price index excluding food and energy, rose 1.4 percent after a 1.5 percent increase in June.

"We don't think inflation will be something we'll have to worry about until the economy gains traction. But down the road, because of the amount of money the government has put into the economy, we'll have inflation issues later," said Hester.

(Additional reporting by Burton Frierson in New York; Editing by Chizu Nomiyama)