New claims for unemployment benefits rose modestly last week but hovered near levels normally associated with improving labor market conditions, a hopeful sign for the struggling economy.

Initial claims for state jobless aid climbed 6,000 to a seasonally adjusted 401,000, the Labor Department said on Thursday.

It was the second straight week first-time claims hugged the 400,000 mark, which is usually associated with some improvement in the jobs market.

Economists, who had expected claims to rise to 410,000, saw the data as the freshest sign the ailing economy was not falling back into recession.

Claims suggest that layoffs remain contained despite high uncertainty in the economy. We continue to expect moderate growth rather than a recession, said Guy Berger, an economist at RBS in Stamford, Connecticut.

The data falls outside the survey period for the government's closely watched employment report for September, which will be released on Friday and is expected to show a still sickly labor market.

Nonfarm payrolls likely increased 60,000 last month, according to a Reuters survey, after being flat in August.

The gain, however, will mostly reflect the return of 45,000 striking Verizon Communications workers to payrolls. The jobless rate is seen steady at 9.1 percent.

U.S. stocks rose for a third day, while prices for government debt fell. The dollar was weaker against a basket of currencies.

THREAT FROM EUROPE

The high jobless rate has put pressure on incomes, weighing on consumer spending. However, brisk back-to-school shopping benefited many U.S. retailers in September, with strong sales growth posted at chains from Kohl's Corp to Nordstrom Inc suggesting optimism for the holiday season.

Overall, 23 U.S. retailers posted an average sales gain of 5.1 percent at stores open at least a year, or same-store sales, according to Thomson Reuters. For more see

The National Retail Federation estimated retailers will hire about 480,000 to 500,000 employees this holiday season, about the same as last year, which suggests the sector will not provide a meaningful boost to the government's employment gauge.

While the jobs market remains troubled, data ranging from manufacturing to motor vehicle sales have suggested the economy, which expanded at a 1.3 percent annual rate in the second quarter, will avoid an outright contraction in output.

Europe's debt crisis presents the biggest threat.

Treasury Secretary Timothy Geithner said on Thursday the crisis could significantly damage the U.S. economy, although major U.S. banks and money market funds have little direct exposure.

Europe is so large and so closely integrated with the U.S. and world economies that a severe crisis in Europe could cause significant damage by undermining confidence and weakening demand, he told Congress.

European Union moves to shore up ailing banks shifted into higher gear on Thursday, with the European Central Bank turning up its liquidity pumps to provide longer-term cheap money.

Slow domestic growth prompted the Federal Reserve last month to announce a new measure designed to push long-term borrowing costs lower by shifting assets on its balance sheet.

Interest rates have dropped in response, with the 30-year fixed mortgage rate falling to a record low 3.94 percent this week, according to mortgage financing source Freddie Mac.

Although the labor market stalled in August, it appears to have regained some footing in late September. The four-week moving average of initial claims -- considered a better measure of labor market trends -- fell for a second straight week.

If initial jobless claims continue to trend lower that would be an encouraging sign that labor market conditions may be improving, said John Ryding, chief economist at RDQ Economics in New York.

(Editing by James Dalgleish)