New claims for unemployment insurance fell more than expected last week to their lowest level in nearly two years as seasonal layoffs eased at factories, government data showed on Thursday.

Initial claims for state unemployment benefits dropped 29,000 to a seasonally adjusted 429,000 last week, the lowest since late August 2008, the Labor Department said.

Analysts polled by Reuters had expected claims to fall to 450,000 from the previously reported 454,000, which was revised up to 458,000 in Thursday's report.

The four-week moving average of new jobless claims, considered a better measure of underlying labor market trends, fell 11,750 to 455,250.

New claims for jobless benefits normally rise this time of the year as manufacturers, including auto makers, implement annual shut downs. However, General Motors is keeping the majority of its plants open during the annual summer retooling shutdown to meet demand for some models.

A Labor Department official said layoffs that are normally scheduled for this time of the year did not appear to have materialized.

This not just a General Motors thing, we are seeing this across a swathe of states, we did not see an increase in claims as we would normally, the official said.

The weak labor market, characterized by a 9.5 percent unemployment rate, is holding back the economy's recovery from the most painful recession since the 1930s.

Lack of income has caused consumer spending to turn sluggish in the past months, prompting economists to trim down their growth forecasts for the second quarter.

Federal Reserve policy makers, according to minutes of their June 22-23 meeting released on Wednesday, felt they should be ready to consider additional steps to boost the economy if the already weak outlook worsened.

Claims for jobless benefits have been above levels that are normally associated with sustainable job growth, even though companies are no longer aggressively dismissing workers.

In the week ended July 3, the number of people still receiving benefits after an initial week of aid jumped 247,000 to 4.68 million, the Labor Department said. The level was well above market expectations for 4.41 million.

The insured unemployment rate, which measures the percentage of the insured labor force that is jobless, rose to 3.7 percent during that period from 3.5 percent in the prior week.

The number of people on emergency benefits dropped 236,162 to 3.91 million in the week ended June 26. Concerns over the country's massive budget deficit are frustrating efforts to extend jobless aid to millions of Americans whose benefits have run out. Analysts fear the impasse could further weigh on consumer spending.

According to Labor Department data, about 45 percent of the 14.6 million people unemployed in June had been out of work for six months or more.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)