U.S. stocks fell for the second day on Thursday as Cisco's cautious outlook for a recovery and falling telecom stocks offset optimism about the economy spurred by a steep drop in the number of workers filing new claims for jobless benefits.

The stock market's second day of declines followed a four-day rally that had taken the major U.S. indexes up on Tuesday to their highest closes since last fall.

Cisco Systems Inc , the world's largest network equipment manufacturer and a Dow component, weighed on the Nasdaq a day after its Chief Executive John Chambers said business is improving but it's too soon to call a recovery. After Wednesday's closing bell, Cisco gave a gloomy revenue outlook.

Shares of Cisco fell 0.2 percent to $22.13.

Cisco caused investors to pause and look really into what has powered the rally, said Craig Hester, chief executive officer of Hester Capital Management in Austin, Texas.

Despite the latest pullback, the broad Standard & Poor's 500 Index is up 47.4 percent from its 12-year closing low in early March.

It's harder to impress the market, having already baked in the good numbers, good earnings, Hester said. We are now more concerned about outlook.

The Dow Jones industrial average <.DJI> was down 29.32 points, or 0.32 percent, at 9,251.65. The Standard & Poor's 500 Index <.SPX> was down 5.37 points, or 0.54 percent, at 997.35. The Nasdaq Composite Index <.IXIC> was down 17.04 points, or 0.85 percent, at 1,976.01.

Cisco's outlook and disappointing earnings from low-cost wireless carrier MetroPCS Communications
overshadowed the morning's release of government data showing initial claims for state unemployment insurance benefits fell more than expected in the latest week.

Shares of MetroPCS Communications sank 30.1 percent to $8.87 on the New York Stock Exchange after its profit fell short of expectations.

Before the opening bell, Wall Street got some positive data when the Labor Department said initial jobless claims fell 38,000 to a seasonally adjusted 550,000 in the week ended August 1 from a revised 588,000 the previous week.

The all-important government non-farm payrolls report, which shows the number of jobs lost in July, is due on Friday.

The market, however, got support from the financial sector, with shares of insurer American International Group Inc up 3.8 percent at $22.85, following Wednesday's surge of nearly 63 percent.

The U.S. Securities and Exchange Commission said on Thursday it had reached a settlement with AIG's ex-CEO Hank Greenberg. He has agreed to pay $15 million to settle the SEC's allegations of improper accounting transactions.

The financial sector also got a lift from positive analyst comments on Bank of America Corp , up 1.1 percent at $16.84, and an analyst's upgrade of American Express Co , up 3.3 percent at $31.35.

July retail sales also investors some reason for optimism as some U.S. retailers reported sales declines that were not as steep as expected. Investors are looking for signs of life among recession-weary consumers to help underpin a potential economic recovery.

The S&P retail index <.RLX> was up 1.3 percent.

Shares of Gap Inc jumped 8 percent to $18.11 after reporting same-store sales and giving a second-quarter earnings outlook range that beat analysts' expectations, according to Reuters Estimates.

(Additional reporting by Leah Schnurr; Editing by Jan Paschal)