width=341New claims for unemployment benefits fell more than expected last week to their lowest level in two months, offering cautious hope for the economic recovery that had shown signs of fatigue.

Initial claims for state unemployment benefits dropped 21,000 to a seasonally adjusted 454,000, the lowest level since early May, the Labor Department said on Thursday. It said the number of people continuing to receive benefits in the final week of June was the lowest in seven months.

Analysts polled by Reuters had expected claims to fall to 460,000. A raft of weak reports on consumer spending, the housing market and factory activity had left investors worried the economy could slip back into recession.

I think we are too quick in dismissing the potential for growth in the second half of the year, I don't think it is going to be as weak as earlier thoughts had it, said Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi in New York.

Stock index futures added gains on the data, while Treasury debt prices extended losses. Investors were also calmed by the International Monetary Fund's upgrading of its 2010 global growth forecast, which cited robust expansion in Asia and renewed U.S. private demand.

However, the IMF warned the euro area's debt crisis posed a big risk to recovery.

Last week, the four-week moving average of new jobless claims, seen as a better measure of underlying labor market trends, fell 1,250 to 466,000.

Although a Labor Department official said there was nothing unusual in the report, the decline in claims could have been exaggerated by the fact that General Motors is limiting its annual summer plant shutdown.

General Motors announced last month that nine of its 11 domestic assembly plants would continue operating during the June 28 to July 9 shutdown to meet demand for some models.

Automakers use the summer shutdowns to complete the annual model changeover and support maintenance operations, and analysts have cautioned that this might distort claims data over the coming weeks and make it difficult to get a clear pulse of the jobs market's health.

A sluggish labor market is blunting the economy's recovery from the longest and deepest recession since the 1930s. High unemployment is putting a damper on spending, fanning fears among investors the economy could fall back into recession.

Last month, private hiring rose by 83,000 after rising only 33,000 in May, the government said on Friday. But total non-farm employment dropped 125,000 as the government laid off 225,000 temporary census workers.

With unemployment high, U.S. consumer spending has turned sluggish. But stepped-up promotions appeared to help lift sales at several top U.S. retail chains in June.

In the last week of June, the number of people still receiving jobless benefits after an initial week of aid dropped 224,000 to 4.41 million, the lowest since November last year, the Labor Department said. The level was way below market expectations for 4.60 million.

The insured unemployment rate, which measures the percentage of the insured labor force that is jobless, fell to 3.4 percent in the week ended June 26 from 3.6 percent the prior week.

The number of people on extended benefits dropped 367,948 to 4.15 million in the week ended June 19, the department said. The decline likely reflected delays by Congress in extending jobless benefits for the long-term unemployed, most of whom have been out of work for six months and more.

(Reporting by Lucia Mutikani; Additional reporting by Dhanya Skariachan and Chris Reese in New York; Editing by Andrea Ricci)