Retail sales rebounded strongly in December as stores slashed prices to get customers through the door, boosting hopes the economy avoided recession at the end of 2011 even if the outlook remains poor.

Before the data, economists were forecasting that British output contracted 0.1 percent in the last three months of 2011 and the first three months of 2012, which would put the country in a mild recession.

This would be a blow to Conservative finance minister George Osborne, increasing public doubts about the government's five-year plan to largely erase Britain's big budget deficit.

However, the figures from the Office for National Statistics on Friday increase the chances the economy skirted contraction at the end of last year. Retail sales volumes grew by 0.6 percent in December after a 0.5 percent drop in November, driven by rises in clothing and food sales.

On the year, sales were 2.6 percent up -- the biggest rise since the start of 2011 -- and sales growth in the three months to December, the relevant period for fourth-quarter GDP, was the highest since August 2010.

The increase in retail sales volumes in December boosts hopes that the economy avoided contraction in the fourth quarter, said Howard Archer, the chief UK economist at consultancy IHS Global Insight.

Nonetheless, Archer and others warned December's strong performance may prove to be a flash in the pan.

2011 has proven a grim year for many retailers, with well-known brands such as discount clothing chain Peacocks, shoe store Barratts and outdoor goods retailer Blacks Leisure all going into administration.

A consumer confidence measure from Nationwide showed morale was near the lowest in the survey's 7-year history last month, as shoppers worried about the outlook for 2012, which is darkened by rising unemployment and the euro zone debt crisis.

ONE-OFF BOOST?

A number of one-off factors pushed up retail sales in December, including earlier-than-usual discounting by clothing retailers and a favourable annual comparison with December 2010, when heavy snow disrupted trade.

This modest spike in sales came at considerable cost to retailers, many of whom started aggressive price promotions as early as November, said James McGregor, director of retail consultancy Retail Remedy. Many clothing retailers have already been forced into clearance mode to shift unsold stock.

December's retail price deflator -- a measure of inflation -- slumped to an annual 2.4 percent from 3.6 percent in November, the lowest level since August 2010 and the biggest one-month drop since October 2008.

This will be some comfort to the Bank of England, which hopes big falls in inflation in 2012 will boost real household spending and also enable it to carry on with its programme of quantitative easing asset purchases.

Most economists expect it to announce another 50 billion pounds of asset buys in February when the current 75 billion pound round is complete.

Some retailers see grounds for optimism, due to lower raw material costs and BoE forecasts that inflation will fall sharply from its current level of 4.2 percent.

The finance director of Associated British Foods, which owns discount clothing chain Primark, told Reuters on Thursday that inflation pressures were easing.

And on Friday, upmarket department store and supermarket chain John Lewis reported total sales in the week to January 14 were 9.9 percent up on a year earlier.

(Additional reporting by Fiona Shaikh; editing by Chris Pizzey)