The U.S. economy grew at a 2.9 percent annual pace in the second quarter, faster than originally reported but less of an upward revision than expected, as higher business investment offset a drop in residential construction, a Commerce Department report showed on Wednesday.

Analysts polled by Reuters were expecting the second pass at GDP estimates for the April-June quarter to be revised up to a 3 percent annual pace from the initial 2.5 percent estimate for the quarter released last month.

Even so, excluding the Hurricane Katrina-affected final quarter of last year, it was the slowest quarterly U.S. growth pace since a 2.6 percent gain in the fourth quarter of 2004 on the biggest decline in homebuilding in more than ten years.

An inflation gauge favored by the Federal Reserve - a measure of personal consumption expenditure prices minus food and energy - was revised slightly downward to a 2.8 percent gain from an originally reported 2.9 percent rise. The last time there was an equivalent rise in the category was in the first quarter of 2001.

Businesses spent more on buildings, plants and factories than originally thought in the second quarter. The 22.2 percent rise was the biggest gain in nonresidential fixed investment in structures since the second quarter of 1994.

However, in a sign the housing sector is cooling rapidly, investment on residential structures fell 9.8 percent, the biggest decline since a 12.2 percent fall in the second quarter of 1995, the Commerce Department said.

Investment in inventories, exports, and spending by state and local governments were also higher than first thought.

But business investment in equipment and software was revised to a larger decline of 1.6 percent, the biggest drop since the fourth quarter of 2002.

Corporate profits after taxes rose 2.1 percent in the second quarter, a much smaller gain than the 14.8 percent rise in the first three months of the year.

The Federal Reserve has been counting on a slowdown in economic growth to keep inflation in check. Minutes of the Fed's August 8 meeting - when the Fed halted a two-year string of interest rate increases - showed policy makers concerned about rising prices but patient on the need for more rate hikes as they awaited further economic data.