U.S. business inventories rebounded in April, potentially setting up inventory investment to contribute to economic growth this quarter after being a drag since the fourth quarter.

Inventories increased 0.3% after dipping 0.1% in March, the Commerce Department's Census Bureau said on Tuesday. The rebound in inventories, a key component of gross domestic product, was in line with economists' expectations.

Inventories rose 1.0% year-on-year in April. Private inventory investment has been a drag on GDP for two straight quarters, slicing off 0.45 percentage point from growth in the January-March quarter, the government reported last month.

The economy grew at a 1.3% annualized rate in the January-March quarter, the slowest pace in nearly two years.

Businesses have been carefully managing stocks amid an uncertain economic outlook. Strong domestic demand has also contributed to the relatively low inventory level.

Retail inventories increased 0.7% in April as estimated in an advance report published last month. They gained 0.1% in March. Motor vehicle inventories shot up 1.6%, revised up from the previously estimated 1.5% increase.

They climbed 1.3% in March. Retail inventories excluding autos, which go into the calculation of GDP, rose 0.3% as reported last month. They fell 0.4% in March.

Wholesale inventories edged up 0.1% in April, while stocks at manufacturers also inched up 0.1%.

Business sales rose 0.3% in April after slipping 0.2% in March. At April's sales pace, it would take 1.37 months for businesses to clear shelves, unchanged from March.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)