The U.S. factory sector and the job market showed surprising weakness in data released on Thursday, raising concerns the Federal Reserve may need to deliver more interest rate cuts to shore up the economy.

A report by the Philadelphia Federal Reserve Bank showed manufacturing in the Mid-Atlantic region grew more weakly than economists predicted in October. Its business activity index dipped to 6.8 in October from 10.9 in September.

Economists polled by Reuters had forecast a reading of 7.3. Any reading above zero indicates growth in the region's manufacturing sector.

However, the report's inflation gauge shot higher, suggesting the Fed will have to choose between taming price growth and supporting the economy when it meets later this month.

"I'm just happy it's keeping its head above water. Despite the gyrations in the financial markets and some degree of credit squeeze, manufacturing is forging ahead," said Ken Mayland, president of Clearview Economics LLC, in Pepper Pike, Ohio.

A separate report showed the number of U.S. workers filing new claims for jobless aid registered an unexpectedly steep increase in the latest week, raising concerns about an economy already struggling with the effects of a housing slump.

The Labor Department said new claims for unemployment aid climbed by 28,000 last week, much more than anticipated and the biggest increase for any week since February.

The weak tone of the day's data led financial market participants to raise bets that the Fed will further reduce official borrowing costs to stimulate the economy, sending interest rate futures higher.

After the Philly Fed report, stocks held onto the day's earlier losses, as did the dollar. Bonds, which usually benefit from signs of economic weakness, extended their gains.

A separate report from the Conference Board in New York showed its Index of Leading Economic Indicators rose a modest 0.3 percent in September after declining 0.8 percent in August, offering some reassurance about future prospects.

MID-ATLANTIC MANUFACTURING MIXED

There were mixed signals behind the overall weakness in the Philadelphia Fed report, which covers factories in eastern Pennsylvania, southern New Jersey and Delaware. Any reading above zero indicates growth in the sector.

The new orders index tumbled to 2.7 -- the lowest since March -- from September's 15.1, suggesting a poor outlook for the future.

However, the employment index rose to 12.6 from 7.5 in September and six-month business conditions firmed to 41.5 from 35.7 in September.

Also, the level of respondents saying they expected business conditions to improve six months from now was the highest in about three years.

But the prices paid index jumped to 40.3 -- the highest since August 2006 -- from 23.1, which will raise concerns over inflation. At the same time, the six-month capital expenditures outlook eased to 20.5 from 21.3 in September.

"There are a lot of hopes it will rebound, but right now there are some causes for concern," said Josh Stiles, bond strategist and managing director with IDEAglobal in New York.

(Additional reporting by Glenn Somerville in Washington and John Parry in New York)

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