Fresh signs the U.S. economy has broken out of its summer soft patch emerged on Thursday as data showed a gauge of jobless benefits hit a new two-year low last week and pending home sales unexpectedly rose in October.

The picture also brightened as retailers recorded their best sales gains in four years in November, with shoppers drawn in by deals throughout a month that culminated with a surge in Black Friday traffic.

The reports were the latest to suggest a pick-up in activity in the fourth quarter.

There seems to be no doubt that the economy is improving and likely to continue to improve, said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

Initial claims for state unemployment aid increased 26,000 to a seasonally adjusted 436,000 last week, the Labor Department said. But a four-week moving average -- a better gauge of underlying labor trends -- fell to its lowest level since the week ending Aug 2, 2008.

While claims bounced off the prior week's two-year low, they stayed in a range economists say indicate some strength in the labor market. Economists had forecast claims rising to 425,000.

The claims data has little bearing on Friday's employment report for November as it falls outside the survey period.

Anecdotal evidence points to a firming labor market and the government is expected to report that nonfarm payrolls rose 140,000 last month after increasing 151,000 in October, according to a Reuters survey.

DEMAND FIRMING

The core story here is that firmer demand and easing credit conditions for smaller firms are allowing them to hang on to people who might otherwise have been let go, said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

The National Association of Realtors said its Pending Home Sales Index, based on contracts signed in October, jumped 10.4 percent to 89.3. Economists had expected a decline of 0.5 percent.

U.S. stocks rallied for a second day on the data and as the European Central Bank allayed some concerns of a growing euro-zone financial crisis with hefty purchases of Portuguese and Irish debt. The ECB, however, said it was not currently planning to increase the size of its liquidity program.

The dollar fell against the euro and the yen, while prices for U.S. government debt dropped.

Europe's sovereign debt crisis early this year helped to slow the U.S. economy's recovery from its worst recession since the Great Depression of the 1930s.

Analysts say the Federal Reserve's decision to loosen monetary policy further through additional purchases of $600 billion worth of government debt should help shield the U.S. economy from much of the turbulence in Europe.

Two Fed officials said on Thursday the controversial program, intended to drive already low interest rates down further and boost demand, was subject to regular review. But they were split on the program's effectiveness on the economy.

STRAINS REMAIN

Despite signs of improvement, strains remain in the labor market. The number of people still receiving jobless benefits under regular state programs after an initial week of aid rose 53,000 to 4.27 million in the week ended November 20, above expectations for 4.21 million.

Taken together, today's number is a reminder that even in a labor market that is gradually healing, the improvement won't happen in a straight line, said Michael Feroli, an economist at JPMorgan in New York.

The number of people on emergency unemployment benefits increased 142,874 to 3.94 million in the week ended November 13, the latest week for which data is available.

A total of 8.91 million people were claiming unemployment benefits during that period under all programs. However, the number is set to fall as about 2 million unemployed people will lose their benefits by the end of this month after Congress did not act on Tuesday to renew them.

Feroli estimated the loss of benefits could cut household income by 0.2 percent in December with a similar or slightly smaller drag on personal spending.

The effect on January income and spending would be somewhat larger, in the event that the delay in reinstating benefits lasts that long, said Feroli.

(Additional reporting by Emily Kaiser; Editing by Andrea Ricci and Padraic Cassidy)

Unemployment