WASHINGTON (Reuters) - The number of U.S. workers filing new applications for unemployment insurance rose less than expected last week and a measure of underlying trends hit a nearly 16-month low, underscoring the improving labor market tone.

Initial claims for state unemployment benefits rose only 1,000 to a seasonally adjusted 434,000 in the week ended January 2, the Labor Department said on Thursday, after declining for two consecutive weeks.

Analysts polled by Reuters had forecast claims rising to 447,000 from a previously reported 432,000.

U.S. stock index futures held losses after data, while Treasury debt prices hovered at lower levels.

Investors were also eyeing reports on December sales from U.S. retailers. Early reports from retailers on Thursday, including Sears Holdings Corp and Costco Wholesale Corp, showed sales rose during the holiday shopping season.

The labor market has shown strong signs of healing, with the pace of layoffs slowing sharply in the past months as the economy resumed growth following its worst recession in 70 years.

That declining trend in job losses is expected to be underscored by the December employment report due on Friday.

Analysts polled by Reuters forecast nonfarm payrolls falling 8,000 last month after declining 11,000 in November. However, the unemployment is expected to edge up to 10.1 percent in December from 10 percent the prior month.

The state of the labor market is viewed as among the key factors that will determine the timing of the Federal Reserve's first interest rate increase since it cut key overnight lending rates to near zero in December 2008. The central bank has vowed to keep them low for an extended period.

The four-week moving average for new claims dropped 10,250 to 450,250 last week, the lowest since mid-September 2008 and the 18th straight weekly decline. The four-week moving average is viewed as a better measure of underlying trends as it levels out week-to-week volatility.

The four week average is pushing into the 450,000 territory associated with labor market stability.

The number of workers still collecting benefits after an initial week of aid fell 179,000 to 4.80 million in the week ended December 26. This was below market expectations for 4.98 million. So-called continuing claims are below their peak of 6.9 million in June and have declined for three straight weeks.

The drop in so-called continued claims is most likely the result of people exhausting their benefits after the regular 26 weeks provided by states. The number of people on emergency unemployment compensation rose to 5.1 million from 4.91 million.

The insured unemployment rate, which measures the percentage of the insured labor force that is jobless, fell to 3.6 percent in the week ended December 26, the lowest since January last year, from 3.8 percent.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)