Consumer sentiment is often seen as a proxy for future spending, which accounts for two-thirds of the U.S. economy. The stock and government bond markets largely held steady after the report, which did not change expectations for a rate cut by the Federal Reserve next week.
The decline in sentiment was driven by eroding expectations about future economic conditions. The gauge that measures these expectations dropped to 70.1 from the preliminary reading of 71.6 and September's 74.1 to its lowest in a year, the survey group said.
"People are scared because you have oil over $90 a barrel. You also have the housing (slump) scaring them. Both worries are hitting them at the same time," said said David Wyss, chief economist at Standard & Poor's Ratings Services in New York.
"When consumers get scared, they are going to be spending less money and that's not good for economy," he added.
Unlike previous years, when confidence fell due to transitory factors such as brief spikes in gasoline prices, the current decline was driven by concerns about falling home prices, the group said.
Twenty-eight percent of homeowners said the value of their home declined, above the 1992 peak of 24 percent who said that during the last housing slump, according to the survey.
Twenty-two percent of homeowners expect the value of their home to decline in the year ahead, up from 14 percent who said that three months ago.
The group expected confidence to erode further as house prices continue to slide and prices for gas and home heating rise.
"Each downward step raises the probability of recession, which is still below 50 percent but not comfortably so," the group said.
For now, the data still indicate an average growth rate of 2.0 percent in personal consumption expenditures over the next four quarters, with the weakest quarters around the turn of the year, the survey group said.
But the data implied continued declines in housing starts and home sales through at least mid-2008, the group said. The survey's gauge of current consumer conditions was 97.6 in late October, below the preliminary reading of 98.2 and the September level of 97.9. It stood at 107.3 in October 2006.
The survey's one-year inflation index was unchanged from September at 3.1 percent, but up from October's preliminary reading of 3.0 percent. The five-year index was unchanged from early October at 2.8 percent but down from 2.9 percent in September.
Higher US Homeowner Vacancy Rate
Separately, the Census Bureau said Friday that the share of U.S. homes owned but empty rose to 2.7 percent at the end of September, in a sign of weakness in the housing sector.
The rate, which was up from the 2.6 percent reported in the second quarter, indicates that a large share of the nation's homes are on the market but not selling, said Dean Baker, a director of the Center for Economic and Policy Research in Washington.
"There are a lot of vacant homes out there and a lot of pressure on many homeowners to sell," he said.