The U.S. economy sprouted more green shoots of recovery in data released on Thursday, with weekly jobs figures showing unexpected improvement and the slumping factory sector revealing dramatic signs of a rebound.

The data stopped the week's stock market slide and shored up hopes that the U.S. economy, which has been in recession since December 2007, may have hit bottom, but the labor market and hard-hit factory sector clearly are not out of danger yet.

Indeed, the number of U.S. workers filing new claims for jobless benefits rose in the latest week, but economists were heartened by the first drop in the number of unemployed people remaining on benefit rolls since January and the biggest decline since November 2001.

This dovetailed well into a Federal Reserve report on manufacturing in the U.S. Mid-Atlantic area, where activity contracted in June for the ninth consecutive month but much less severely than anticipated and far less than the previous month.

Though analysts expressed caution over the data, they said it was in line with views that the economy's rate of deterioration is slowing, a necessary step before growth resumes.

I think when you take a look at the numbers it clearly is an improvement going on, said Bill Schultz, chief investment officer at McQueen, Ball & Associates in Bethlehem, Pennsylvania.

Now the question is do we get back to the growth stage or whether this is just a rebound from the negativity that we've seen over the past year?

Further support to economic optimists came from the Conference Board's forward-looking measure of the U.S. economy, which posted its biggest increase in five years in May.

On Wall Street, stocks were up a solid 1 percent in afternoon trade, halting a steep slide earlier in the week.

U.S. government bond prices, which benefit more from signs of economic weakness due to their low risk appeal, were down sharply.

BAD NEWS, GOOD NEWS

Initial claims for state unemployment insurance rose 3,000 to a higher-than-expected 608,000 last week, the Labor Department said. Analysts polled by Reuters were expecting claims to dip to 600,000 from a previously reported 601,000.

That was practically the only bad news in the day's numbers. In the same weekly jobs report, continued claims tumbled 148,000 to a smaller-than-anticipated 6.69 million in the week to June 6, the latest week for which data is available. It was the lowest since May 9, and the largest one-week drop since November 2001.

In another sign labor market weakness may be easing, the four-week moving average for new claims, considered a better gauge of underlying trends as it smooths out week-to-week volatility, dipped to 615,750, the lowest since February 14.

PHILADELPHIA STORY

The Philadelphia Fed said its business activity index jumped to its highest level since last September, rising to minus 2.2 in June from minus 22.6 in May.

That was well above economists' expectations of minus 17, based on the median of forecasts in a Reuters poll and above even the highest of estimates, which topped out at minus 6.

A reading below zero indicates contraction in the region's manufacturing sector, but there was vast improvement throughout the report.

New orders, a measure of future business, also hit their highest level since September and the employment gauge hit its highest level since November.

The Conference Board's index of leading indicators suggested economic improvement was more than a regional story.

The index, which is supposed to forecast economic trends six to nine months ahead, rose 1.2 percent in May after a revised 1.1 percent increase in April.

It was the second consecutive rise and the largest since a 1.4 percent jump in March 2004.

The recession is losing steam, said Ken Goldstein, a Conference Board economist. Confidence is rebuilding and financial market volatility is abating.

Wall Street economists had forecast a rise of 0.9 percent.

(Additional reporting by Mark Felsenthal and Wendell Marsh in Washington and Mary Angela Rowe in New York; Editing by Leslie Adler)

Pennsylvania Unemployment Jobs