Thu Aug 6, 2009 1:17pm EDT  

By Lucia Mutikani;

WASHINGTON (Reuters) -

The number of U.S. workers filing new claims for jobless benefits fell sharply last week, a government report showed on Thursday, boosting views the labor market and the economy were stabilizing.

Initial claims for state unemployment insurance fell 38,000 to a seasonally adjusted 550,000 in the week ended August 1 from 588,000 the prior week, the Labor Department said.

A Labor Department official described the period under review as "uneventful" and said it appeared the distortions to the weekly data caused by the auto plant closures were out of the way. Analysts polled by Reuters had forecast new claims to edge down to 580,000 last week.

U.S. stock index futures extended gains on the data, while government bond prices slipped.

"The claims data are another sign that the recession could be behind us," said Kevin Flanagan, fixed-income strategist at Global Wealth Management, Morgan Stanley in Purchase, New York.

"I am optimistic that a recovery is in the process of beginning, but we will need to see continued improvement in claims going through (below) the 500,000 level before the consumer is willing to come on board and be part of the recovery."

Analysts said the report also bodes well for July non-farm payrolls data due on Friday.

"We should see a decline of 300,000. It's a big step in the right direction in the labor market," said Lindsey Piegza, market analyst at FTN Financial in New York.

A Reuters survey forecast 320,000 workers lost their jobs last month, which would be the least for any month since September when employers cut 321,000 jobs.

The jobless rate was seen climbing to 9.6 percent -- the highest since June 1983 -- from 9.5 percent in June, as employers remain reluctant to hire because of depressed demand.

Labor market weakness is casting a shadow over the economy's recovery prospects from the worst recession in over 60 years as high unemployment exerts pressure on incomes, severely curtailing households' spending capacity. Consumer spending is the main driver of U.S. economic activity.

STIMULUS HELPING?

Christina Romer, chairman of the White House Council of Economic Advisers, said on Thursday the $787 billion U.S. stimulus program was stabilizing the economy despite unacceptably high job losses.

But she said it would take time for the labor markets to improve.

"Unfortunately, even once GDP (gross domestic product) begins to grow, it will likely take still longer for employment to stop falling and begin to rise," she said. 

In a sign that the trend was toward a moderation in the pace of layoffs, the four-week moving average for new claims fell 4,750 to 555,250 in the week ended August 1.

The four-week moving average is considered a better gauge of underlying trends as it irons out week-to-week volatility. The moving average has declined for six consecutive weeks.

However, the number of people collecting long-term unemployment benefits rose by 69,000 to 6.31 million in the week ended July 25, the latest week for which the data is available. The so-called continuing claims had declined for three straight weeks. The insured unemployment rate was unchanged at 4.7 percent for the fourth straight week.

(Additional reporting by Richard Leong and John Parry; Editing by Neil Stempleman