U.S. consumer spending was flat in December as households put the largest rise in income in nine months into their savings, potentially signaling slower consumption early in 2012.

It was the weakest reading on spending since June, the Commerce Department said on Monday, and it followed two tepid gains in October and November.

Still, economists were cautiously optimistic that rising wages as labor markets improve will keep demand supported.

I do believe there is some underlying trend that gives us some reason to feel a little bit better about what lies ahead regarding spending, and the main reason is the labor market, said Anthony Karydakis, chief economist at Commerzbank in New York.

U.S. economic growth quickened in the fourth quarter and hiring picked up, but activity is expected to soften early this year. Federal Reserve Chairman Ben Bernanke said last week that the central bank was considering a further easing of monetary policy to support growth.

Economists had expected consumer spending, which accounts for more than two-thirds of U.S. economic activity to nudge up 0.1 percent, the same as in October and November.

Spending adjusted for inflation dipped 0.1 percent last month after edging up 0.1 percent in November.

U.S. financial markets ignored the report, with investors focused on the spat between Greece and Germany over budget measures for Athens. Stocks on Wall Street fell, while Treasury debt prices rallied. The dollar rose against the euro.

INCOME RELIEF

The government said on Friday that consumer spending grew at a 2 percent annual pace in the fourth quarter, a pick-up from the third quarter's 1.8 percent rate, which helped lift gross domestic product by 2.8 percent.

While an expected recession in the euro zone is expected to start weighing more heavily on U.S. activity this quarter, the economy has some underlying momentum and is not expected to contract.

Data from the Federal Reserve Bank of Dallas showed a strong rebound in factory activity in the Texas this month, with new orders the highest in six months. Employers hired more new workers and extended hours for their existing workforce.

That is good news for wages, whose sluggish growth prompted households to tap savings and credit cards to fund purchases last year. Savings last year were the smallest since 2007.

An increase in wages last month helped lift incomes 0.5 percent, the largest gain since a matching increase in March.

If the December wage and salary gains can be sustained, households will have the ability to spend more, said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

The gains in income reflect a pick up in hiring. Nonfarm payrolls rose 200,000 in December. A report on Friday is expected to show a slight pull back in January, with employers adding 150,000 jobs, according to a Reuters survey.

Small businesses added 50,000 jobs this month after a 60,000 gain in December, according to payrolls processing firm Intuit.

WATCH THE SAVING RATE

Taking inflation into account, after-tax income rose 0.3 percent last month after being flat in November. With disposable income outstripping spending, the saving rate rose to a four-month high at 4 percent.

We should be watching closely the behavior of the saving rate in the coming months for signs that consumers may be adopting a more defensive posture, said Commerzbank's Karydakis.

The spending report showed inflation pressures generally contained, with a price index for personal spending nudging up 0.1 percent after being flat the prior month.

In the 12 months through December, the PCE price index was up 2.4 percent - the smallest gain since April 2011.

A core inflation measure, which strips out food and energy costs, rose 0.2 percent last month after gaining 0.1 percent in November. Over the past 12 months, it was up 1.8 percent - the largest rise since March 2010 and just a touch below the Fed's 2 percent inflation target.

(Reporting by Lucia Mutikani; Editing by Tim Ahmann and Neil Stempleman)