British retail sales soared unexpectedly in January as Britons splashed out on furniture and sports goods, adding to signs that the economy is returning to growth.

The Bank of England and the government are hoping that consumers will spend more this year to support the fragile economy because inflation is falling.

A raft of strong business surveys and evidence of stabilisation in the labour market have raised hopes that Britain will avoid recession after an economic contraction in the last three months of 2011.

Data from the Office for National Statistics showed on Friday that retail sales volumes rose 0.9 percent on the month to give an annual rise of 2.0 percent.

An improvement in consumers' confidence, aided by falling inflation, and traditional January discounting may have lifted sales during the month, boding well for GDP growth in the first three months of this year.

It suggests at the very least that we will be growing by 0.5 percent quarter-on-quarter in the first quarter and probably faster than that, said Scotia Capital economist Alan Clarke.

Economists had forecast a monthly fall of 0.4 percent in sales. This compares with a monthly rise of 0.6 percent in December, when shops lured cash-strapped customers with hefty pre-Christmas discounts.

Sterling rose and gilt futures extended losses after the January retail sales data, which showed the strongest increase since April 2011 when warm weather and Britain's royal wedding boosted sales.

The ONS noted that retailers' promotions on household goods and furniture helped drive the monthly increase in sales in January. However, BNP Paribas economist David Tinsley said the figures indicated that discounting was not the lone driver.

The latest data chimes with other recent signs of a tentative recovery in all-important consumption, which accounts for more than 60 percent of Britain's output.

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A survey by lender Nationwide showed that British consumers' confidence rose in January to its highest level since August as they grew much more upbeat about the following six months.

Moreover, only 47 percent of grocery shoppers now believe they will be worse-off in the year ahead compared to 61 percent a year ago, a survey by IGD ShopperVista showed, while retail bellwether John Lewis said its department store sales rose 4.1 percent on the year in the week to February 11.

Many Britons have been cutting back spending over the past year as price increases outpaced wage rises and higher unemployment weighed on confidence, and the sluggish consumption has been one of the main drags on economic growth.

Business surveys - which cover a much smaller number of shops - had earlier indicated a weak January for Britain's retailers. However, they has also showed that retailers were slightly less pessimistic about business in February.

Retail prices increased by just 2.2 percent on the year in January - the slowest increase since November 2009 - indicating that inflationary pressures are easing as the Bank of England is predicting.

The central bank has left the door for further stimulus ajar after it decided earlier this month to pump another 50 billion pounds of quantitative easing into the economy.

(Editing by Jeremy Gaunt.)