US economic growth slowed to an annual rate of 1.6% in the third quarter of 2006, its lowest level for three years.
The US housing market is weaker than last year
Commerce Department figures showed that the slump in the US housing market was largely responsible for the loss of economic momentum.
The data showed a 17.4% annual fall in spending on new housing.
During the previous three months the economy had grown by 2.6%. Now the rate is at its lowest since the first quarter of 2003, when it was 1.2%.
However, some analysts said that consumer spending, buoyed by a fall in fuel prices, would provide a boost to the economy with some forecasting a growth rate of 3% in October to December.
Lower costs at the petrol pump, combined with strong employment figures led to improving consumer sentiment during October, a survey said.
The index, compiled by the University of Michigan, was at 93.6 in October, up from September's figure of 85.4.
However, the slump in gross domestic product (GDP), well below Wall Street expectations, comes as a blow to President George W Bush ahead of the US midterm elections next month.
The economy, alongside immigration and the war in Iraq, is expected to be a major influence on voters when they go to the polls.
Political reaction to the figures was swift. Republicans pointed to the sustained rally in key stocks on the Dow Jones index as proof of the US economy's resilience. White House spokesman Tony Snow told reporters that economic growth would "continue to rebound".
Treasury Secretary Henry Paulson said the housing boom had been "clearly unsustainable" and the market had "needed to have a correction".
However Nancy Pelosi, a leading Democrat politician, said that "just because the president looks through his rose-coloured glasses and sees a strong economy doesn't make it so".
Another Democrat, Senator Jack Reed, said the growth figures contradicted "the President's claim that his tax cuts are working".
Analysts said the news meant an interest rate rise from the US Federal Reserve was now unlikely to be imminent - with some predicting a rate reduction as being more probable.
The UK-based Centre for Economics and Business Research (CEBR) said it expected US growth would be revised up slightly but that the picture remained "one of a controlled economic slowdown".
"Weak GDP figures will likely give the markets something to worry about, although on the other hand, they will raise expectations that the next move in interest rates will be down," said CEBR senior economist Jonathan Said.
In the US, the data also caused a surprise.
"Below 2% is certainly a negative surprise and suggests that the economy is cooling off faster than anticipated," said Bank of New York strategist Michael Woolfolk.
"But it is certainly in line with the Federal Reserve's story that a moderation in growth will help core inflation come back down into its comfort zone in the mid term."
Latest figures show that annualised economic growth in the UK is 2.8%, while it is 3.4% in the eurozone.