U.S. consumer sentiment (search) deteriorated sharply in early June, suggesting persistent unemployment is taking its toll on Americans' expectations for the economy's future.

Despite an upbeat tone in the stock market, the University of Michigan (search) 's closely watched gauge of consumer confidence slipped to 87.2 in June from May's 92.1. The report caught Wall Street forecasters off guard -- they had pegged the figure at 93.4, according to a Reuters poll.

More worrying, the survey's gauge of consumers' outlook on the future of the economy slumped to 84.2 from 91.4 in May, indicating Americans are having a hard time suogressed.

Analysts said the decline in confidence reinforced the prospect that the Federal Reserve (search) would have to resort to another reduction in interest rates in an effort to kick-start a stalled economic recovery.

"Not only does this reinforce this idea that we do have further interest rate cuts coming in the period ahead, but that there will be lower rates for a long period of time," said Marcel Kasumovich, head of G10 foreign exchange strategy at Merrill Lynch.