U.S. retail sales slipped modestly in January as auto sales fell from lofty December levels, but aside from car sales posted their biggest surge since March 2000, the Commerce Department said Wednesday in a report that bodes well for the economy's recovery.

Retail sales dipped 0.2 percent overall in January, but were up a larger-than-expected 1.2 percent outside the automotive sector, the department said.

While gains were seen in many retailing sectors in January, the overall number was boosted by an outsized 5.1 percent increase in gasoline station sales, largely the result of higher prices at the pump. Excluding gasoline, retail sales were actually down 0.6 percent in the month.

Analysts polled by Reuters had expected sales fell 0.3 percent overall in January. Sales outside of autos, however, were expected to rise by 0.4 percent.

Economists watch retail sales closely, as consumer spending on goods and services makes up two-thirds of economic activity. The resilient stance of consumers, who continued to spend moderately in the fourth quarter, offset weak investment by businesses in new plants and equipment and fueled an unexpected rise in U.S. gross domestic product, which increased at a 0.2 percent annual rate.

Sales in December were revised upward to a 0.2 percent rise overall and a 0.7 percent gain excluding cars. The department had previously reported declines of 0.1 percent in both categories.

With signs the recession that began in March has bottomed out, policymakers at the Federal Reserve have taken a more cautious stance on interest rates. After cutting rates 11 times to 40-year lows in 2001, the Fed held rates steady at its January meeting.

Fed Chairman Alan Greenspan is to offer an updated assessment of the economy's health when he appears before a Capitol Hill panel later this month to deliver the central bank's twice-a-year report to Congress.

Tim O'Neill, chief economist with Bank of Montreal/Harris Bank in Toronto, said the January retail report was "better than expected, but on balance not dramatically better."

Within January's report, the gain in gas station sales was the largest since a 5.5 percent increase in February 2000. Purchases at department stores were up 2.0 percent and sales of building materials and garden equipment were up 2.9 percent.

Offsetting those gains was a 4.3 percent drop in auto dealer sales, the biggest decline since September, when attacks on New York and Washington depressed all retail activity dramatically. Sales at bars and restaurants were off by 2.0 percent in January.

Reuters contributed to this report.