The number of U.S. workers filing for jobless benefits unexpectedly rose last week, but another big gain in productivity in the fourth quarter offered hope that companies were closer to adding to payrolls.

Initial claims for state unemployment insurance increased 8,000 to 480,000, the Labor Department said on Thursday. Financial markets had expected claims to come in at 460,000.

While claims are down sharply from their peak last spring, the improvement has stalled in recent weeks. Despite the setback, analysts are optimistic hiring will pick up soon as firms run out of ways to boost output without new workers.

Business productivity grew at a 6.2 percent rate in the fourth quarter as employers ramped up that quarter's output at the fastest pace in six years and kept a tight lid on hiring, another Labor Department report showed.

Economists had expected productivity, which measures the hourly output per worker, to rise at a 6.0 percent rate after gaining 7.2 percent in the third quarter. In the second quarter, productivity had risen 6.9 percent.

The fact that we have had three such extremely strong quarters of productivity in a row suggests it has to stop, said Bill Cheney, chief economist at John Hancock Financial Services in Boston.

I am fairly convinced we are going to see an upturn in employment because employers simply won't be able to maintain any growth in sales without hiring additional bodies, he said.

Similar sentiments were echoed by U.S. Treasury Secretary Timothy Geithner. I think that there is encouragement in that, but we have a long way to go, he told the Senate Budget Committee.

STOCKS TUMBLE ON CLAIMS

Investors, however, frowned at the rise in jobless claims. U.S. stocks ended sharply lower, also pressured by mounting sovereign debt problems in Europe.

U.S. government debt prices rallied as bonds attracted a flight-to-quality bid, while the dollar soared against the euro.

Job creation is seen as President Barack Obama's most pressing priority. Anxiety over a 10-percent unemployment rate may have cost Obama's Democrats a crucial Senate seat last month and threatens big losses for the party in the November congressional elections.

Obama lunched with top business executives on Thursday to discuss the economy and job creation and Democratic leaders in the Senate unveiled a proposal that they hope will help bring down the jobless rate.

High unemployment has curtailed consumer spending, but the worst of the retrenchment appears to be done. Major retail chains reported higher January sales compared with a year earlier, when the recession was at its deepest point, and monthly job losses soared to 741,000.

The government will release its closely-watched employment report for January 2010 on Friday. A Reuters survey predicted nonfarm payrolls grew 5,000 after a surprise 85,000 drop in December. The unemployment rate, however, is expected to edge up to 10.1 percent in January from 10 percent.

Median forecasts from the top 20 forecasters saw payrolls unchanged last month.

Productivity has grown for five straight quarters as employers slashed costs, mostly by cutting jobs, to cope with the worst economic downturn since the Great Depression. In 2009, productivity grew 2.9 percent, the biggest annual rise in six years.

The big productivity gains allowed businesses to ramp up output in the second half of the year, even as they were letting employees go. In the fourth quarter, the economy grew at a 5.7 percent annual pace, also its fastest clip in six years.

That recovery was underscored by a report on Thursday that showed an unexpected surge in orders received by U.S. factories and a drop in inventories in December.

The productivity report showed non-farm output grew at a 7.2 percent rate in the final three months of 2009, the fastest pace since the third quarter of 2003.

Hours worked rose at a 1.0 percent rate, the first increase since the second quarter of 2007 and the fastest since the fourth quarter of 2006. Some economists said that was another sign businesses might need to start hiring soon.

Unit labor costs, a gauge of inflation and profit pressures closely watched by the Federal Reserve, fell a steeper than expected 4.4 percent after declining 1.5 percent in the third quarter, pointing to scant wage-related pressures.

Unemployment Inflation Barack obama Timothy geithner