Stocks slipped on Thursday as an unexpected rise in initial jobless claims and unimpressive July retail sales highlighted the uneasy economic climate ahead of tomorrow's payrolls report.

Government data showed initial claims for jobless benefits rose to 479,000, the highest level since early April. The report heightened investor caution a day before Friday's key monthly jobs report and countered some of the optimism generated by Wednesday's ADP report, which showed a larger-than-expected gain in private employer hiring.

It's just a matter of caution ahead of tomorrow, said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

There are so many uncertainties out there for businesses and consumers, yet the market has wanted to climb that wall of continuing worry here over the last couple of weeks.

The S&P 500 has climbed nearly 10 percent since hitting its closing low for the year on July 2, largely in response to better-than-expected earnings.

The Dow Jones industrial average <.DJI> dropped 21.80 points, or 0.20 percent, to 10,658.63. The Standard & Poor's 500 Index <.SPX> shed 3.34 points, or 0.30 percent, to 1,123.90. The Nasdaq Composite Index <.IXIC> slipped 9.82 points, or 0.43 percent, to 2,293.75.

Economists polled by Reuters are expecting Friday's U.S. Labor Department report to show a drop of 65,000 in non-farm payrolls in July as temporary U.S. Census Bureau jobs dried up. Private employers are expected to have added 90,000 jobs.

Weakness in consumer spending trends also stayed in focus as the 28 retailers tracked by Thomson Reuters reported July same-store sales that rose only 2.9 percent -- falling short of analysts' expectations for a 3.1 percent gain.

Among retailers, department store operator JC Penney Co Inc stumbled 7.3 percent to $22.21 while youth-oriented apparel chain Aeropostale Inc slumped 6.5 percent to $25.66.

The Morgan Stanley Retail index <.MVR> shed 0.6 percent.

After five straight days of gains, the Morgan Stanley Healthcare Payor index <.HMO> dropped 0.9 percent, dragged lower by Molina Healthcare Inc , which tumbled 10.8 percent to $28.28 after the health insurer posted quarterly results that fell short of revenue expectations and said it would offer 4 million shares.

The drop in Molina shares overshadowed a 5.3 percent gain in Cigna Corp to $33.86 after the insurer reported a far higher-than-expected profit in the second quarter and raised its full-year forecast.

(Reporting by Chuck Mikolajczak; Editing by Jan Paschal)