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The result was worse than expected. Economists blamed Europes debt crisis, which sparked a fresh bout of sharemarket volatility during the month and eroded consumer confidence.

The chief economist at HSBC, Paul Bloxham, said stores had also been damaged by the huge growth in online shopping and spending on services, which is not captured in these figures.

Theres been a big shift in household behaviour. They are now spending more on services and online, and less at retail stores, he said.

As more shoppers cashed in on the strong Australian dollar at foreign retail websites, the figures showed department stores suffered another 0.1 per cent decline in sales. Clothing and electronic goods both fell 0.5 per cent.

Cafe and restaurant spending was one of the few areas to buck the trend, rising 0.2 per cent. Spending on alcoholic drinks rose 1.8 per cent.

Retailing was showing signs of the two-speed economy. The mining powerhouse states posted the biggest rises.

West Australian retailers enjoyed a 0.8 per cent increase in spending, followed by a 0.5 per cent rise in Queensland. NSW experienced a 0.3 per cent rise, while sales in Victoria dropped by 1.1 per cent.

In contrast to the weakness in retail, separate figures from the Housing Industry Association showed new home sales jumped by 6.8 per cent after the November rate cut.

But as sales of detached homes were only recently at their lowest level in a decade, the associations chief economist, Harley Dale, said sales were still running about 20 per cent below healthy levels. He said further cuts in interest rates were needed for full recovery in the market.

Interest rate cuts, both those weve had and those that are still warranted, provide a starting catalyst for a sustained and strong recovery in new home building conditions, Dr Dale said.

Retailing and housing are among the most sensitive parts of the economy to changes in interest rates, so analysts have been watching them after rate cuts in November and December.

Mr Bloxham said that if retailing and other parts of the economy that were sensitive to interest rates such as housing remained weak, the Reserve Bank would be more likely to cut interest rates again.