WASHINGTON — Consumers, battered by a steep downturn in housing and a severe credit crunch, slowed their spending growth in September while a key gauge of factory activity flashed its weakest reading in seven months in October.

The Commerce Department reported Thursday that consumer spending rose by 0.3 percent in September, the smallest rise in three months and lower than the 0.4 percent increase that analysts had been expecting. Incomes grew by 0.4 percent, matching the August gain, and in line with analysts' forecasts.

Meanwhile, the Institute for Supply Management, an Arizona-based trade group, said its manufacturing index dipped to 50.9 in October, down from a September reading of 52.0. The October performance was below the 51.8 that economists had been expecting and showed that the overall economic slowdown is having an impact on the nation's factories. A reading below 50 indicates that manufacturing activity is contracting.

The worse-than-expected economic news sent stocks lower with the Dow Jones industrial average down more than 200 points in the first hour of trading Thursday.

Investors and economists are worried about whether the economy will be able to sustain a variety of setbacks from a deepening housing slump, to the severe credit crunch which hit in August and now record-high oil prices.

The Federal Reserve on Wednesday cut a key interest rate for the second time in six weeks in an effort to make sure the economy does not tumble into a recession. However, the central bank also expressed concerns that surging oil prices could fan inflation pressures. Oil prices have soared to record highs in recent days.

The news about inflation from the consumer spending report was good. Prices paid by consumers on the Fed's preferred inflation gauge rose a moderate 0.2 percent in September, excluding food and energy. This measure is up 1.8 percent over the past 12 months, inside the Fed's comfort zone of increases in core inflation of between 1 percent and 2 percent.

In other economic news, the Labor Department said that the number of newly laid off workers filing claims for unemployment benefits fell by 6,000 last week to a total of 327,000. That was a bigger drop than analysts had been expecting.

Analysts are looking for the unemployment rate to rise slightly in coming months, reflecting a slowing economy. For September, economists believe the jobless rate remained at 4.7 percent with businesses creating a modest 80,000 new jobs. The government will release that data on Friday.

The overall economy grew at a stronger-than-expected annual rate of 3.9 percent in the July-September quarter, helped by a rebound in consumer spending, which accounts for two-thirds of total economic activity.

But analysts believe that growth will slip to less than half that level in the current quarter and the first three months of 2008 under the impact of the worst housing downturn in more than two decades, which has rattled consumer confidence.

Many economists see the next few months as the maximum danger point when the economy could slip into a full-blown recession. However, analysts still believe the chances are good that the country can avoid a downturn because they believe the Fed will help matters by cutting rates further should economic data weaken more.

The 0.3 percent September rise in spending followed gains of 0.5 percent in August and 0.4 percent in July. It was the slowest rise since spending edged up by just 0.2 percent in June.

If inflation is removed from the spending figures, the rise in spending was even weaker in September, an inflation-adjusted increase of just 0.1 percent, compared to a 0.6 percent surge in August.

The 0.4 percent rise in personal income was matched by a similar 0.4 percent rise in after-tax incomes. The savings rate rose to 0.9 percent in September, the best showing since March.