(Adds details from latest survey)

* Consumer sentiment falls to lowest in four months

* Expectations tumble on fears of possible tax hikes

* High-, low-income families more worried than middle-income

* Most homeowners report rising home values since 2008

By Richard Leong

NEW YORK, Dec 7 (Reuters) - Americans' outlook on the economy and their finances took a turn for the worse in early December, likely due to anxiety about the potential for higher taxes resulting from contentious discussions in Washington over fiscal issues, a survey released on Friday showed.

The Thomson Reuters/University of Michigan's preliminary reading of its index of consumer sentiment plunged to 74.5 in early December, the lowest level since August.

It was far below November's figure of 82.7 and the median forecast of 82.4 among economists polled by Reuters.

"Confidence plunged in early December as consumers confronted the rising likelihood that political gridlock would push the country over the fiscal cliff," survey director Richard Curtin said in a statement. He was referring to concerns of an economic contraction next year if the White House and Congress fail to reach a budget pact by year-end.

The "fiscal cliff" is a series of federal spending cuts and tax hikes worth $600 billion that would phase in next year if Washington does not take action to change the situation. Economists say the "fiscal cliff" could cause a U.S. recession.

One in four consumers mentioned hearing about prospects for higher taxes when asked to identify what economic news they had heard, the latest survey data showed.

Consumers' mood is seen as a predictor of their spending, which accounts for two-thirds of the U.S. economy. The steep drop in confidence at this time bodes poorly for retailers who count on year-end holiday shopping to boost their bottom line.

The survey's barometer of current economic conditions edged down to 89.9 in early December from a November final reading of 90.7. Economists had forecast a stronger reading of 91.0.

The survey's gauge of consumer expectations tumbled to 64.6, also its lowest level in four months. It was far weaker than the 77.6 at the end of November and an expected figure of 78.0.

The measure of consumers' 12-month outlook also fell hard in early December. It dropped 22 points from late November to 75, the lowest level since August.

The survey's one-year inflation expectations rose to 3.3 percent from 3.1 percent, while the survey's five-to-10-year inflation outlook inched up to 2.9 percent from 2.8 percent.

A bright spot in the glum report was that one in four home-owners reported rising home values, the highest proportion since January 2008 and further evidence of an improving real estate market.


YEAR-END TAX, JOB ANXIETY

Breaking down the survey households by income, the drop in confidence was most pronounced among the top third and bottom third, while the middle-income ones showed a small decline.

While much of the attention on the tax fight in Washington has been on the wealthiest Americans, the payroll tax holiday is also a part of the talks and affects far more workers.

"While a spending reduction from tax hikes on top income households can be anticipated, it will not influence confidence or spending as much as the end of the payroll tax holiday," Curtin said.

Confidence among middle-income families fell 3.9 points in early December from late November. Confidence among low-income households and top-income ones fell 9.0 points and 12 points.

Increased worries about the labor market also undermined confidence in the economy despite evidence to moderate hiring.

The survey suggested job worries intensified to their highest level in a year as Americans reckoned companies might either hold back on hiring or fire workers in response to the possibility of higher income taxes and costs related to the federal Affordable Healthcare Act, dubbed Obamacare.

"This prompted consumers to significantly lower the pace of economic growth they anticipated and resulted in the majority of consumers to expect bad times financially in the year ahead as well as economic relapses over the next five years," Curtin said.

Earlier on Friday, the Labor Department said the U.S. jobless rate fell to 7.7 percent in November, the lowest in nearly four years, although the decline stemmed from more Americans giving up on looking for work in tough job climate. (Reporting by Richard Leong; Editing by Chizu Nomiyama)

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