By Pedro Nicolaci da Costa

WASHINGTON (Reuters) - Americans face the seemingly intractable dilemma of having to reduce their levels of debt but not so rapidly as to derail a nascent economic recovery.

How that transition is handled has wide-ranging implications for global growth, which is still heavily reliant on U.S. consumption. Two reports this week should offer some sense of how the dynamic is playing out.

U.S. consumer credit is expected to have shrunk another $9.3 billion in October, marking the ninth straight month of contraction for the longest streak of declines since the data was first compiled in 1943.

November retail sales, for their part, are projected to have climbed 0.6 percent following sharp, auto-fueled gains in the prior month.

In Europe, economists will be looking at industrial production in Germany and retail sales in Britain for clues as to whether the region's incipient economic rebound can be sustained.

Germany has made some strides in combating unemployment in recent months, a success that the United States hopes to emulate given its deep labor market woes.

The latest U.S. figures on Friday offered reason for cautious optimism, with a sharp decline in job losses that suggested an outright turnaround could come sooner than many have believed.

"For the first time in what seems like forever, the employment report conveyed some hope that the labor market nightmare may soon end," said Michael Feroli, economist at JP Morgan.

The flickers of light could not have come at a more crucial time, at the start of the holiday shopping season that drives a good chunk of U.S. retail activity.

If firms do begin hiring again, it could prevent a renewed hit to bank lending, which would in turn crimp spending again.

"We face a dilemma, which is we want banks to lend and we're encouraging them to lend, but we certainly don't want them to make bad loans because, of course, that's what got us in trouble in the first place," said New Hampshire Democratic Senator Jack Reed at a banking committee hearing.

The U.S. Congress is looking at ways to reform the financial system, following what many people say were glaring regulatory failures that pushed the global financial system to the brink last year.

The House of Representatives may soon vote on a bill that would, among other things, give regulators the power to break up big financial firms that threaten stability. Policy makers want to avoid a situation like the fall of Lehman Brothers, which led to large-scale disruptions in the flow of credit.