Strong spending by consumers and by the government helped power the expansion as growth in gross domestic product - the measure of all goods and services produced within US borders - accelerated from the second quarter's 3.3 percent rate.
The GDP report, along with a separate one on employment costs from the Labour Department, pointed to underlying economic strength and muted price pressures, which analysts said meant the Federal Reserve can stay on a course of small, measured interest-rate rises.
But a nongovernment report showed rising interest rates and energy costs may be taking a toll on consumers' moods at a crucial time - just ahead of the vital holiday shopping season between Thanksgiving and Christmas.
In its first snapshot of third-quarter growth, the Commerce Department said it could not give an overall tally of how the twin hurricanes that struck the US Gulf Coast in late August and September affected the economy, but it said about $40 billion were lost in wages and rents.
Wall Street economists had forecast GDP would advance at a 3.6 percent rate in the July-to-September quarter. The economy has now expanded at rates exceeding 3 percent for 10 straight quarters.
"This is a very positive, strong report and encouraging because it included Katrina and a spike in oil prices and we still just seem to have a lot of momentum going into the fourth quarter," said economist Kurt Karl of Swiss Re in New York, adding that he expected another Fed rate rise on Tuesday.
Despite surging prices at the gasoline pumps, the report showed that so-called core inflation, which exempts food and energy from its calculation, declined in the third quarter.
A price gauge favoured by Federal Reserve Chairman Alan Greenspan - personal consumption expenditures excluding food and energy - increased at a 1.3 percent annual rate compared with 1.7 percent in the second quarter. That marks the mildest rate of core price rises since the second quarter of 2003.
Fed policy-makers have pushed US short-term interest rates up 11 times since mid-2004 to keep a rein on prices. Its policy-setting Federal Open Market Committee is scheduled to meet again on Tuesday and is once again widely expected to nudge rates up a quarter percentage point.
The University of Michigan's index of consumer sentiment dropped to a final reading of 74.2 from September's 76.9 and from a preliminary reading of 75.4 in early October, according to sources who saw the subscription-only report.
"This holiday spending season will be softer," predicted economist Anthony Chan of J.P. Morgan Asset Management in Columbus, Ohio, who added that rising energy costs were making people nervous. "Sales will take a bit of a hit."
The Labour Department reported that its Employment Cost Index rose 0.8 percent in the third quarter, slightly ahead of the second quarter's 0.7 percent. But in the past 12 months, overall employment costs have risen only 3.1 percent - the smallest rise in six years - and wage costs alone have advanced only 2.3 percent for the smallest gain on record.
"The third-quarter Employment Cost Index is ... reassuring in the sense that labour costs as measured on this index remain very contained, in contrast to some other labour cost indexes," said economist Pierre Ellis of Decision Economics in New York.
The third-quarter inventory drop was the largest since the fourth quarter of 2001 - after the attacks in New York and on the Pentagon - when they fell at an $86.7-billion rate, a department official said.
Lean inventories can imply that companies have room to ratchet production up quickly if they are confident consumer spending will remain brisk - something that analysts have cautioned is questionable as costly energy takes a rising toll on household budgets with the winter heating season approaching.
However, personal spending, which accounts for about two-thirds of national economic activity, grew at a 3.9 percent annual rate in the third quarter, exceeding the second quarter's 3.4 percent.