Confidence among U.S. small businesses was stuck at 35-year lows in March, with employers stepping up layoffs even as the recession-hit economy shows some signs of improving, according to a survey.

The National Federation of Independent Business (NFIB) said in a survey released on Tuesday that its index of small business optimism fell 1.6 points to 81.0 from February, the second-lowest reading in the organization's 35-year history.

There are signs that the economy may have bottomed. But small business owners have yet to be impressed and remain skeptical, unwilling to commit to more spending or hiring until they 'see the whites of their eyes', customers in the store, said NFIB Chief Economist William Dunkelberg.

There is cautious optimism that the economy, in recession since December 2007, will recover in the second half of this year. Data such as those on housing and retail sales have recently surprised on the upside, suggesting a moderation in the economy's free-fall.

Still, small businesses continue to cut payrolls to contain costs. The survey found that job losses in the first quarter among small businesses were the worst in the survey's history.

About 12 percent of the 867 respondents who took part in the survey planned to cut jobs over the next three months, up two points on the February survey. Another 12 percent said they planned to create new jobs, down one point.

It appears that (business) owners are not through with their labor-based cost cutting, said Dunkelberg.

The U.S. economy lost 663,000 jobs last month, driving the unemployment rate to a 25-year high of 8.5 percent, according to government data.

The NFIB survey also found that employers were also reducing compensation for workers, with a record 11 percent reporting having taken such measures. About 11 percent, an all-time low, said they had raised worker compensation.

Cost cutting is likely being overdone. What this portends, however, is a rapid improvement in employment and earnings when the economy establishes a forward momentum, said Dunkelberg.

Capital spending remained near record lows in March, the survey found, and owners did not expect business conditions to improve over the next six months.

Businesses were using widespread price cutting to liquidate inventories and 63 percent of the respondents reported profits falling, up four points from February, the survey found.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)