By Rita Nazareth and Nikolaj Gammeltoft June 11 (Bloomberg) -- U.S. stocks erased losses after a report showing consumer confidence increased in June by more than economists estimated offset the biggest drop in American retail sales since September. Consumer and telephone companies led the retreat in the Standard & Poor’s 500 Index, decreasing more than 0.5 percent as a group. Among Dow Jones Industrial Average stocks, Procter & Gamble Co., Coca-Cola Co., AT&T Inc. and Kraft Foods Inc. fell the most with declines exceeding 1 percent. The S&P 500 slumped 0.1 percent to 1,085.97 at 10:18 a.m. in New York, trimming weekly gain to 2 percent, still the most in a month. The Dow fell 18.97 points, or 0.2 percent, to 10,153.56. “Consumer confidence was quite a relief,” said James Paulsen, who helps oversee about $375 billion as chief investment strategist at Wells Capital Management in Minneapolis. “It was a very encouraging sign that despite the problems in Europe maybe the U.S. will be able to ride through this. The fundamentals are there. It’s true that we had disappointing retail sales data earlier today. It would be encouraging if a rally could hold.” Confidence among U.S. consumers rose in June to the highest level in more than two years, a private survey showed. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment increased to 75.5, the highest since January 2008, from 73.6 in May. The gauge was projected to rise to 74.5, according to the median forecast in a Bloomberg News survey of 65 economists. ‘Very Skittish’ Earlier, the U.S. Commerce Department said retail sales decreased 1.2 percent, the biggest drop since September 2009, following a 0.6 percent April gain that was larger than previously estimated. Purchases were projected to increase 0.2 percent, according to the median estimate of 76 economists in a Bloomberg survey. Forecasts ranged from a decline of 0.7 percent to a gain of 1 percent. “Investors are very skittish,” said Peter Jankovskis, who helps manage about $2.2 billion as co-chief investment officer at Oakbrook Investments in Lisle, Illinois. “Everyone is focused on the consumer to gauge the strength of the economic recovery. There’s concern about Europe, the oil spill. It’s been very hard to get a back-to-back rally.” The S&P 500 completed its first two-day advance since April on June 3. The benchmark index for U.S. stocks fell 11 percent since April 23 through yesterday on speculation the credit crisis spreading in Europe will curb global economic growth. U.S.-traded shares of BP Plc plunged 46 percent since April 20, when the biggest oil leak in U.S. history began at one of the firm’s wells in the Gulf of Mexico. “The market is hypersensitive to any negative data because of the tug-of-war for market direction that exists right now,” said Lawrence Creatura, a Rochester, New York-based fund manager at Federated Investors Inc., which oversees $350 billion. “Weaker-than-expected retail data is likely to be reflected in lower share prices in the short term because of the macro concern that the U.S. consumer will go back into a cocoon.” To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net.

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