Investors nevertheless took heart from the news that household spending remained solid at the start of the third quarter, while upward revisions sales in May and June imply slightly stronger second-quarter economic growth than earlier reported.
Wall Street stocks opened higher, with the Dow Jones Industrial Average up over 50 points by mid-day, while big European bourses also pushed ahead.
The dollar rallied against sterling and the euro. The prices of U.S. government bonds initially retreated after the data eased concerns over the health of the consumer. Treasury prices later recouped lost ground.
"The data should be read as saying that the trend was a bit sturdier than previously thought going into this stress -- certainly not a bad thing -- but otherwise not as indicative of ongoing sustainability as might otherwise be the case in calmer circumstances," Goldman Sachs wrote in a note to clients.
It was also the first in a hefty week for data, with producer and consumer prices, trade, industrial production and housing starts all scheduled for release.
Excluding autos, retail sales were up 0.4% in July as forecast and the prior month was revised to a 0.2% decline versus a 0.4% fall initially reported.
Economists polled by Reuters forecast overall retail sales to rise 0.2% compared with a revised 0.7% drop in June, previously reported as a 0.9% drop.
So-called core retail sales, which exclude cars, gasoline and building materials, were up 0.6% from a 0.3% gain in June.
Purchases of motor vehicles and parts, which make up around one fifth of total sales, fell 0.3 percent. Gasoline, which can have a big impact on consumer spending, fell 0.8 percent.
"This report points to an improving trajectory for the consumer. We are not at all surprised, as the peak in gasoline prices came in late May and would have taken their maximum toll on household outlays in June," said Stephen Stanley, chief economist at RBS Greenwich Capital, in a note to clients.
He said the upward revisions to May and June's retail sales could lift second-quarter U.S. gross domestic product growth to a 3.8 percent annual pace from the 3.4 percent rate earlier reported.
Economists had also expected a strong U.S. jobs market to support consumption, despite the impact of cooling U.S. housing and turmoil caused by problems in the market for subprime mortgages for borrowers with risky credit.
In fact, furniture and home furnishings sales rose 0.5 percent and building material and garden supplies were up 0.2 percent. Sales of clothing and accessories jumped 1.3 percent, while sales at food and beverage stores, health and personal care also advanced.
The reported strength was somewhat at odds with the news from U.S. retailers, who had generally announced disappointing sales in July. Wal-Mart Stores, the world's largest retailer, reported a 1.9 percent rise in July sales at U.S. stores but said it had cut prices to attract shoppers.
Business Inventories Up
In other Commerce Department data on Monday, inventories at U.S. businesses rose 0.4% in June as forecast. The gain in stocks at hand followed an unrevised 0.5% rise in May. Sales dipped 0.3% in June after climbing 1.3% the previous month.
Economists monitor the data for clues on whether businesses are building stocks in anticipation of rising demand, although the judgment is tricky since an increase in inventories can also reflect weaker than anticipated sales.
June's inventory-to-sales ratio, a measure of how long it would take to deplete stocks at the current pace of sales, edged up to 1.27 months' worth from 1.26 in May.
The June buildup of motor vehicles and parts at businesses mounted 1.0%, posting the category's largest monthly increase since June of 2006, when they jumped 1.3%. The U.S. auto industry has been forced to bolster sales through a program of aggressive incentives.