Retail sales fell 1.6 percent in February as consumers were daunted by record winter storms and uncertainty over the sluggish economy and a possible war in Iraq.

The monthly decline was the largest since November 2001, when the economy was still reeling from the Sept. 11 terrorist attacks, the Commerce Department reported yesterday. The drop was about three times as great as economists had predicted and heightened concerns that the economy may begin to contract again.

"I don't like to be negative, but consumers are not doing fine," said Richard Yamarone, chief economist at Argus Research. "The blizzards may have kept people home" on the critical Presidents' Day weekend. "But let's be truthful. . . . Consumers are skittish because of the job market outlook and unfortunately it doesn't look like it will get better anytime soon."

Consumer confidence remains weak even though interest rates are at their lowest levels in 41 years. "Consumers' pocket books are hurting and aching," said Sung Won Sohn, chief economist at Wells Fargo & Co. "More and more consumers say they'd better be cautious, sit back and see how the economy and the world unfolds before they start spending money."

Economists closely watch trends in consumer spending because it accounts for two-thirds of the economy.

The financial markets ignored the disappointing sales report. The Dow Jones industrial average surged 3.6 percent as markets in the United States and Europe rallied on hopes that a war in Iraq would be delayed.

The 1.6 percent drop in retail sales in February followed a 0.3 percent gain in January, according to revised figures from the Commerce Department yesterday. The government previously reported that sales dropped 0.9 percent in January.

February's declines hit across the board, including the food, apparel, home furnishings, electronics and sporting goods sectors. The largest drop came in the building and garden supplies segment, which plunged 7.5 percent from January, the largest decrease on record for that category and a strong indication that the bad weather adversely affected sales, economists said.

Auto sales fell 3.4 percent on top of a 2.6 percent decline in January, suggesting that the financial incentives offered by car makers were no longer luring buyers. Excluding autos, retail sales fell by 1 percent in February.

"The only material source of strength in the February data was a 2.7 percent rise in gasoline station sales," but that was due to the increase in gasoline prices, according to Stone & McCarthy Research Associates.

Higher gasoline prices may crimp spending further, said Yamarone of Argus Research, noting a rise in energy costs diminishes disposable income. Joblessness and gas prices "are two of the primary influences on spending," he said.

Concerns about job prospects helped send consumer confidence down last month to its lowest level since October 1993.

And the job picture remains fairly bleak. The Labor Department reported yesterday that new claims for unemployment benefits fell by 15,000 last week to 420,000, a level that is still considered indicative of an unhealthy labor market.

The latest data comes just days before the Federal Reserve meets to review interest rate levels. Yamarone predicts it will cut the federal funds rate by 0.25 percentage points, to 1 percent.

Other economists expect no change in rates, although they predict that Fed policymakers may signal a greater concern about the economy's health. "They may want to acknowledge, now that the weight of evidence is heavy, that the downside risks to the economy may outweigh the upside risks to inflation," said Stone & McCarthy.

Several economists expect March retail sales to rebound after the February slump. "These data look awful but we expect a hefty March rebound," said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd.