Softening economic conditions and volatility in financial markets led to a sharp decline in U.S. consumer confidence in August, U.S. the Conference Board said today.

The consumer confidence index fell to 105.0 in August from a revised 111.9 in July, which was a cyclical high, the private economic research group said. That’s the lowest level of confidence since August 2006 and the biggest drop since the aftermath of Hurricane Katrina in September 2005.

However, the decline in confidence wasn’t as large as expected. Economists were forecasting the index to decrease to 104.0 from the initial July reading of 112.6.

Lynn Franco, director of the Conference Board’s research center, said the continued problems stemming from the woes in subprime mortgages may have played a role in the drop in confidence, but softening business and labor market conditions were also factors.

“But despite less favorable conditions and in spite of all the recent turmoil, consumers still remain confident. And, current index levels suggest further economic growth in the months ahead,” Franco said in a statement.

In August, the present situation index fell to 130.3 from 138.3. The index is seen as a good barometer of near-term spending plans.

The number of consumers saying conditions are “good” dropped to 26.4% in August from 28.3% in July. Those claiming conditions are “bad” increased to 16.3% from 14.5%.

The assessment of the labor market was less favorable than last month. Those saying jobs are “hard to get” rose to 19.7% from 18.7% in July.

The expectations index fell to 88.2 in August from 94.4 in July. Inflation expectations were steady in August.