U.S. households' net worth rose $2.7 trillion to $53.4 trillion in the third quarter for a second straight quarterly advance, Federal Reserve data showed on Thursday, which may boost consumers' confidence to spend.

The U.S. central bank's Flow of Funds report said household net worth -- the difference between the value of assets and liabilities -- rose 5 percent from the second quarter.

A strong stock market recovery and continued household debt deleveraging largely contributed to the rise, the data showed.

The economy is steadily recovering from the worst recession in 70 years but weak household balance sheets have weighed on consumer spending, normally the engine of the U.S. economy.

The increase in household net worth will prove to have a positive psychological impact ... that will likely lead to more spending in 2010, said Bernard Baumohl, chief global economist at the Economic Outlook Group in Princeton, New Jersey.

In the third quarter, household debt contracted at a 2.5 percent annual rate from the prior three months, the largest fall on record, the Fed said. It was the fifth consecutive quarterly decline, reflecting steep declines in mortgage and consumer debt, such as credit cards.

Business debt excluding financial institutions also fell at a 2.5 percent annual rate and the decline was widespread across credit market instruments, according to the report.

The federal government's debt increased at a 21 percent annual rate, slowing from the previous three months, but still the fifth consecutive quarter of growth exceeding 20 percent.

The Obama administration has projected the budget deficit for fiscal 2010 to be about the same as the $1.4 trillion gap in fiscal 2009 that ended in September. The government is ramping up efforts to bring down unemployment. The jobless rate is hovering around 10 percent, the highest in 26 years.

(Reporting by Lucia Mutikani; Editing by James Dalgleish)