NEW YORK (Reuters) - The dollar fell on Friday as a plunge in US consumer confidence raised concerns about an economic contraction in the second quarter and trimmed the chances the Federal Reserve will raise interest rates this year.

The unexpectedly sharp drop in a consumer sentiment index to a 28-year low in May eclipsed a report showing a rebound in building permits and construction starts for new US homes, which briefly triggered some dollar buying.

"Consumer sentiment data are closely tied to consumer spending levels," said Andrew Busch, global FX strategist at BOM Capital Markets in Chicago.

"It really shows that the consumer is likely going to have low levels of spending which could translate into a quarter where we have negative GDP growth if this continues into June."

Consumer spending accounts for about two-thirds of the United States' gross domestic product.

The euro raced to a session peak of $1.5600. It was last trading at $1.5589 , up almost one percent on the day. The dollar tumbled to an intraday low of 103.54 yen and was last quoted at 104.18 yen, down 0.5 percent.

The New York Board of Trade's dollar index, which charts the dollar's performance against a basket of six currencies, fell 0.7 percent to 72.836 .

Speculation that April's non-farm payrolls report would be revised to show deeper job losses than the initially reported 20,000 contraction probably added to the dollar's slide, but analysts were sceptical. Data on Friday showed combined figures from the country's various states indicated job losses of 151,000 in April.

"The market should not look at this as an inevitable downward revision that is in the works for the April data. I don't think this is the best reason to sell dollars," said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich Connecticut.

The dollar has rallied in recent weeks on views that the Fed's cycle of interest rate cuts was nearing an end.

A pause by the US central bank after slashing its fed funds rates target by 3.25 percentage points to two percent since mid-September would support the dollar, which has lost its yield appeal to the euro.

Euro-zone interest rates have remained at four percent since June, but analysts reckon slower economic growth could force the European Central Bank to move towards an easing path later this year.

"The dollar has appreciated over the last couple of months based on this change in attitude towards what the Fed is going to be doing with interest rates," said Busch.

"But we are certainly not at a point where we are going to consider that the Fed will start to raise rates at any point and that's why see the dollar losing ground today."

US interest rate futures were pricing an 88-percent chance that the central bank would leave its benchmark rate steady in June. This was down from a 92-percent perceived chance earlier. Prospects for a rate hike by year end have fallen to 78 percent from more than 100 percent.

The Reuters/University of Michigan Surveys of Consumers said its preliminary index of confidence fell more sharply than economists had expected in May to its lowest since June 1980.

Housing starts in April ran at a 1.032-million-unit annual rate, up from a revised 954,000-unit rate in March, while permits gained 4.9 percent to 978,000 a year from a revised 932,000 in March.