WASHINGTON (Reuters) – Sales at US retailers rose more strongly than expected in March and firming domestic demand prompted businesses to rebuild inventories to a seven-month high in February, suggesting a broadening of the economic recovery.

The retail sales report yesterday painted a picture of consumer defiance in the face of high unemployment and tight access to credit, and offered hope the manufacturing-led recovery would continue when the boost from government stimulus and the rebuilding of inventories ebbs.

"Self-sustained recovery are the key words we are all looking for right now and today's retail sales report is a step in that direction," said Robert Dye, a senior economist at PNC Financial in Pittsburgh.

Total retail sales jumped 1.6 percent, the largest increase since November as consumers stepped up purchases of vehicles and a wide range of goods, the Commerce Department said. January sales were revised up to a 0.5 percent rise from 0.3 percent.

The data provided a fresh catalysts for stock bulls to push the S&P 500 index up through a critical level of 1,200, extending the benchmark index's gain since the March 2009 bottom to 77 percent.

Consumer discretionary stocks, which include retailers and other consumer-oriented companies, were among the top gainers.

US government debt prices were marginally lower, while the dollar rose against the yen.

With domestic demand strengthening, businesses have restarted to rebuild inventories from record low levels. Business inventories increased 0.5 percent in February, the largest advance since July 2008, to their highest level in seven months, the Commerce Department said in a second report.

Despite signs the recovery from the worst downturn since the Great Depression may be gaining momentum, Federal Reserve Chairman Ben Bernanke remains cautious.

"Significant restraints on the pace of the recovery remain, including weakness in both residential and nonresidential construction and the poor fiscal condition of many states and local governments," Bernanke told the Joint Economic Committee of Congress yesterday (see related story).

A separate report from the Labor Department showed no signs of inflation pressures, which should help the US central bank honour its pledge to keep its benchmark interest rate unusually low for an extended period.

Consumer prices rose 0.1 percent last month after being flat in February. Excluding volatile food and energy prices, core inflation was unchanged in March after rising 0.1 percent the prior month.

Growing confidence in the recovery, particularly brightening prospects in the job market, is encouraging households to tap into their savings to fund purchases of goods, including luxury items.

Retail sales in March were buoyed by a 6.7 percent rebound in motor vehicle and parts purchases. Excluding motor vehicles and parts, retail sales rose 0.6 percent in March after rising 1.0 percent the prior month as a combination of an early Easter holiday and warm weather boosted receipts at clothing stores.

"This surge in spending reflects a decline in the saving rate rather than a surge in income," said Nigel Gault, chief US economist at IHS Global Insight in Lexington, Massachusetts.

"Consumers will need income support to sustain the expansion, but with the labor market beginning to turn upwards, help is on the way."

Core retail sales, which correspond most closely with the consumer spending component of the government's gross domestic product report, rose 0.5 percent after increasing 1.2 percent February. Analysts said this bode well for first-quarter gross domestic product growth.

"This implies a strong 4 percent gain in real consumer spending in the first quarter and leaves GDP tracking close to 4.5 percent in the first quarter," said Michelle Meyer, an economist at Barclays Capital in New York.