The economy grew at a slower pace than previously estimated in the first quarter as business investment slackened, while hard-hit state and local governments reduced spending at the steepest rate since 1981.

Gross domestic product expanded at a 3.0 percent annual rate, the Commerce Department said on Thursday, instead of the 3.2 percent pace it reported last month.

Analysts polled by Reuters had forecast GDP, which measures total goods and services output within U.S. borders, growing at a 3.4 percent rate in the January-March period. The economy expanded at a 5.6 percent pace in the fourth quarter and has now grown for three straight quarters.

Economists are monitoring the U.S. recovery closely to see how well the economy can endure the debt troubles that threaten to slow Europe's growth. The above-trend first-quarter U.S. growth suggests a solid base of support.

The numbers are slightly shy of hopes, but they show that the U.S. economy is in recovery, said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.

Separately, new applications for state jobless benefits dropped to 460,000 last week from 474,000 in the prior week, the Labor Department said, pointing to a gradual labor market recovery.

U.S. stocks were higher at the open, while Treasury debt prices were down sharply in early trade. The U.S. dollar fell versus the euro.

BUSINESS SPENDING SLOWS

Output in the first three months of the year was revised down as business spending rose at only a 3.1 percent rate instead of the 4.1 percent initially reported last month. Spending grew at a 5.3 percent pace in the fourth quarter.

Business spending on software and equipment increased at a 12.7 percent rate rather than the 13.4 percent rate reported last month.

State and local government spending contracted at a 3.9 percent rate, the largest decline since the second quarter of 1981. However, consumer spending, which is key to the economy's recovery, held up well.

Consumer spending increased at a 3.5 percent rate, rather than the 3.6 percent rate reported last month. Although it was revised down slightly, it was still more than double the 1.6 percent pace in the fourth quarter and the largest advance since the first quarter of 2007.

Consumer spending, which normally accounts for 70 percent of U.S. economic activity, added 2.42 percentage points to GDP last quarter, the largest contribution since the first quarter of 2007.

Real final sales to domestic purchasers, considered a better measure of domestic demand, rose at a 2.0 percent rate. Sales were previously estimated to have increased at a 2.2 percent rate following a 1.4 percent rise in the fourth quarter.

Recovery from the longest and deepest recession since the Great Depression had so far been largely driven by the manufacturing sector as businesses replenished their warehouses to meet strengthening demand. Consumers, however, are now participating as the labor market begins to firm.

The GDP report also showed after tax corporate profits rose 2.1 percent in the first quarter after increasing 6.5 percent in the final three months of 2009. The slowdown in profit growth could dampen hopes of an acceleration in the labor market's improvement.

In the first quarter, the rebuilding of stocks by businesses to meet firming demand gathered momentum. Business inventories rose $33.9 billion rather than the $31.1 billion reported last month. It was the first increase since the first quarter of 2008.

That contributed 1.65 percentage points to overall economic output during the quarter.

Excluding inventories, the economy expanded at a 1.4 percent pace, instead of the previously estimated 1.6 percent rate.

In addition to the weak state and local government spending, a downturn in construction was also a drag on growth in the first quarter. New home construction fell at a 10.7 percent rate, after expanding for two straight quarters.

Spending on structures dropped at a 15.3 percent rate instead of the 14 percent reported last month. While the slowdown in export growth was not as sharp as initially estimated last month, it was overshadowed by a rise in imports.

That left a trade deficit, which subtracted 0.66 percentage points from first-quarter economic growth.

(Reporting by Lucia Mutikani; Additional reporting by Pedro Nicolaci da Costa in Washington and Ryan Vlastelica in New York; Editing by Andrea Ricci)