The Consumer Confidence Index dropped more than 14 points to 114.4, the lowest level since December 1996 when it was 114.2, the Conference Board reported.
The decline in confidence raises a new alarm about the fragility of the economy, with consumers decidedly more pessimistic about business and employment conditions, said Lynn Franco, director of the Conference Board's Consumer Research Center.
"Since apprehension leads to caution and cautious consumers spend less than the confident ones, confidence levels in February will be carefully watched," Franco said. "Further erosions in consumer confidence will create more serious concerns about the overall health of the economy."
But economists noted that consumers continue to view the current situation in relatively favorable terms, with their doubts focused on the future. The question is whether consumers act on those fears, observers said.
"Historically, when we see confidence decline, we have to watch and see if it shows up also effecting spending," said Gary Thayer, chief economist with A.G. Edwards & Sons in St. Louis. "We'll be watching closely to see ... whether the decline in confidence is more of a psychological factor or a real factor affecting spending."
The Conference Board index, based on a monthly survey of some 5,000 U.S. households, is considered a key indicator because consumer spending accounts for about two-thirds of the nation's economic activity. The index compares results to its base year, 1985, when it stood at 100.
The new report will be watched particularly closely, since it follows remarks by Federal Reserve Chairman Alan Greenspan emphasizing the importance of consumer confidence.
Testifying to the Senate Budget Committee last Thursday, Greenspan said the "dramatic slowing" that had brought the U.S. economy "probably very close to zero" growth risked slipping even more if consumer confidence crumbled.
"The critical issue we need to address is whether that degree of contraction is enough to breach the fabric of consumer confidence," Greenspan said. "At the moment, it has not."
The Federal Reserve is expected to cut interest rates on Wednesday by a half-point for the second time this month.
The markets were mixed following the release of the report, with the Dow Jones industrial average up 9 points to 10,711 and the Nasdaq composite index off 10 points to 2,827.
Overall, consumer confidence, which rested at a revised level of 128.6 in December, has fallen four months in a row since the index recorded 142.5 in September. The last time the index fell below 114.4 was in December 1996 when it mesured 114.2, the Conference Board said.
The Conference Board said consumers' expectations for the next six months have worsened. Of those surveyed, 15.7 percent expect business conditions to worsen, compared with 10.1 percent last month. Meanwhile, only 12.4 percent of consumers expect conditions to improve, down from 16.9 percent last month.
About 21.8 percent of consumers expect fewer jobs to become available, up from 15.7 percent in December, the Conference Board said.
And a second leading gauge of consumer sentiment issued by the University of Michigan earlier this month showed that the attitudes of consumers deteriorated to their worst level in four and a half years.
The two-month fall in the Michigan index was the third largest on record and recalled similar steep declines that preceded the recessions of the early 1990s and 1980s.