By Leah Schnurr

Consumer confidence unexpectedly dropped in October to its lowest level in two-and-a-half years, while housing prices were unchanged at anemic levels in August, data showed on Tuesday.

Brighter-than-expected manufacturing and jobs data in recent weeks had tempered fears the economy could lapse back into recession, with most expecting a slow pace of growth that should avoid contraction, but the surprising drop in consumer confidence suggests the improvement in third quarter economic growth may not be sustained.

The S&P/Case Shiller composite index of house prices in 20 metropolitan areas was flat compared with the month before on a seasonally adjusted basis, frustrating expectations for a gain of 0.1 percent.

Separately, the Conference Board said its index of consumer attitudes fell to its lowest level since March 2009 as consumers fretted about job and income prospects.

Analysts said the weaker-than-expected home price data was disappointing but not altogether shocking as the market struggles to get out from under a glut of unsold homes and ongoing foreclosures that are holding prices down.

While prices are expected to remain depressed for some time, any further declines are expected to be modest.

"We were looking at sort of a stabilizing picture at these low levels, and we still see that, but we are still at very stressed levels," said Sean Incremona, economist at 4Cast Ltd in New York.

On a seasonally adjusted basis, prices fell in 14 of 20 cities, with Atlanta and Las Vegas among the biggest losers, according to the S&P/Case-Shiller data.

The annual rate of decline slowed, however, with prices in the 20 cities down 3.8 percent compared with a year-over-year decline of 4.1 percent the month before. That still was a bigger drop than the expected 3.5 percent decline in August.

"The good news is continued improvement in the annual rates of change in home prices," David Blitzer, chairman of the index committee at Standard & Poor's, said in a statement.

"In spring and summer's seasonally strong period for housing demand, we cautioned that monthly increases in prices had to be paired with improvement in annual rates before anyone could declare that the market might be stabilizing."

The struggling housing market continues to be one of the biggest hurdles for the economic recovery as attempts to bolster the sector have had limited success.

In the latest efforts, the Obama administration said on Monday it would expand a mortgage refinancing program in a step that could help up to 1 million borrowers.

A separate home price index from the Federal Housing Finance Agency showed prices declined 0.1 percent in August from July.

The index is calculated using purchase prices of houses financed with mortgages that have been sold to or guaranteed by Fannie Mae or Freddie Mac.

CONSUMERS ON THE ROPES

In financial markets, the day's data was eclipsed by the cancellation of a meeting of euro zone finance ministers that added to doubts about the region's efforts to tackle its debt crisis.

Analysts are hoping to get confirmation of a growing but sluggish U.S. economy from U.S. gross domestic product data for the third quarter later in the week. The advance reading is expected to show the economy grew at an annual rate of 2.5 percent after a weak first half of the year, according to a Reuters poll of economists.

October's drop in consumer confidence, however, suggested any improvement in third-quarter economic growth may not be sustained.

The Conference Board's index of consumer attitudes fell to 39.8 from a upwardly revised 46.4 the month before. Analysts had expected a reading of 46.0.

The expectations gauge was also at its lowest level since March 2009, just before the economy officially crawled out of recession.

Consumer attitudes have soured since the spring, hit by fears of a renewed recession, political gridlock, high unemployment and volatility in the stock market.

"Consumer spending has slowed because confidence has deteriorated, and these numbers are very, very consistent with that view," said Hugh Johnson, chief investment officer of Hugh Johnson Advisors LLC in Albany, New York.

"You can't look at these numbers and be optimistic about growth in 2012."

Earlier this month the Thomson Reuters/University of Michigan's preliminary reading of sentiment for October also showed consumers' attitudes sagged, though not as sharply.

A Tuesday report from the Federal Reserve Bank of Richmond showed manufacturing in the region was unchanged in October with the composite index at minus 6.

(Additional reporting by Chuck Mikolajczak; Editing by Padraic Cassidy)