The trade gap narrowed to 56.5 billion dollars, 0.6 percent lower than a downwardly revised 56.8 billion in August, the Commerce Department said.

The strengthening trade performance came against market expectations of a smaller decline to 58.5 billion dollars, and brought the US gap in goods and services with the rest of the world to a low last seen in May 2005.

Excluding oil imports, the shortfall was the narrowest since May 2004.

The politically sensitive trade deficit with China ballooned to 23.8 billion dollars, up a hefty 5.5 percent from 22.5 billion in August.

The narrowing of the trade gap suggested stronger-than-expected economic activity in the third quarter that could lead to an upward revision of the 3.9 percent rise in gross domestic product (GDP) initially estimated by the government.

"It's a larger improvement than anticipated (and) likely will lead to a revision of growth in the third quarter," said Sal Guatieri, BMO Capital Markets. "We could see the GDP number revised to 4.5 percent or so."

The improving trade snapshot came against an increasingly bleak outlook for the US economy amid a persistent housing slump and forecasts of sharply slowing growth for the fourth quarter as high oil prices bite.

"With domestic spending growth expected to slow sharply as housing continues to decline and consumers wilt under pressure from falling house prices and rising energy prices, strong export growth is crucial to keep the US economy moving forward," said Nigel Gault, US economist at Global Insight.

Gault said the contribution of foreign trade to growth is "crucial if the US is to avoid recession."

Exports led the September improvement, rising 1.1 percent to a record 140.1 billion dollars as Americans sold more food as well as industrial, automotive and consumer goods abroad.

Imports climbed 0.6 percent to 196.6 billion dollars, with a rise in capital goods, automobiles and consumer goods offset by a decline in imported industrial supplies.

The trade deficit fell despite a new record-high price of imported oil, which reached an average 68.51 dollars a barrel in September.

However, the latest trade data showed Americans' appetite for lower-cost Chinese-made goods continued to grow, despite a rash of recalls from toothpaste to dog food and protests by US officials who accuse China of keeping its yuan currency undervalued to gain an unfair trade advantage.

"While there has been some improvement in our sales to China over the year, the level remains fairly limited. Meanwhile, their exports to the US continue to explode. So much for making progress with China on the trade front and that will not make members of Congress very happy," said Joel Naroff of Naroff Economic Advisors.

The dollar's depreciation played a role in the export gains. The trade gap with the European Union plunged 37.1 percent to 6.4 billion dollars, and fell 3.2 percent with Canada to 4.9 billion dollars.

"The weak dollar is performing its magic as exports are surging and the trade deficit is narrowing," said Naroff.

The head of the Manufacturers Alliance/MAPI, Thomas Duesterberg, welcomed the improving balance of trade as "one of the few remaining pillars of growth in the weakening US economy."

"Recent weakness in the dollar should maintain the improving trend in the future," he added.

Over the first nine months of the year, the trade balance stood at 527.5 billion dollars, down from 581.6 billion in the same period in 2006.

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