New applications for jobless benefits in the United States fell last week, while activity in the services sector was at its strongest in nearly a year in August, suggesting a modest recovery from recession had started.

A Labor Department report on Thursday showed initial claims for state unemployment insurance benefits fell 4,000 to a seasonally adjusted 570,000 last week. However, the four-week moving average for new jobless claims, considered a better gauge of underlying trends, rose 4,000 to 571,250.

Separately, the Institute for Supply Management said its non-manufacturing index climbed to 48.4 in August, the highest since September last year, from 46.4 in July. Its employment gauge improved to 43.5 from 41.5 in July.

We are seeing signs that the labor market is stabilizing. It would be better to see that number come down more. That would offer confirmation that the economy is turning the corner and doing better, said Gary Thayer, macrostrategist at Wells Fargo Advisers in St. Louis, Missouri.

U.S. stock indexes fell, while government bond prices were little changed.

Economic data continues to indicate a recovery from the worst recession since the Great Depression of the 1930s is under way, but anemic consumer spending as a result of high unemployment has raised fears the turnaround will be tepid.

While the pace of layoffs has slowed considerably from early this year, companies are reluctant to start aggressively hiring, waiting for a strong signal the recovery will be sustained. The economy slipped into recession in December 2007.

The government's closely watched non-farm payrolls report for August, due on Friday, is expected to show employers shed another 225,000 jobs last month after eliminating 247,000 in July.

The lack of job creation remains a big headwind for cash-starved and credit-constrained consumers, and thus a major impediment for the fledgling recovery, said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

Highlighting companies' reluctance to expand payrolls even as the economy's outlook improves, the number of people on long-term unemployment benefits rose 92,000 to 6.23 million in the week ended August 22, the Labor Department data showed.

However, the four-week moving average fell 27,250 to 6.22 million. The insured unemployment rate, which measures the percentage of the insured labor force who are jobless, inched up to 4.7 percent in the week ended August 22 from 4.6 percent.

ISM's index's business activity component rose to 51.3, up from 46.1 in July. The August reading was its first above 50 since last September.

The services sector represents about 80 percent of U.S. economic activity and includes businesses such as banks, airlines, hotels and restaurants.

(Additional reporting by Ellen Freilich in New York; Editing by Chizu Nomiyama)

Wells fargo Unemployment Fall