New U.S. claims for unemployment benefits dropped more than expected last week, a government report showed on Thursday, pointing to continued gradual improvement in the labor market.

U.S. nonfarm productivity grew faster than expected in the fourth quarter as employers extracted more output from workers and unit labor costs fell, a government report showed on Thursday.

KEY POINTS: * Initial claims for state unemployment benefits tumbled 42,000 to a seasonally adjusted 415,000, the Labor Department said, unwinding most of the previous week's weather-induced spike.

* Economists polled by Reuters had forecast claims dropping to 420,000. The prior week's figure was revised up to 457,000, from the previously reported 454,000.

* The claims data falls outside the survey period for the government's closely watched employment report for January, scheduled for Friday. The economy probably created 145,000 jobs after adding 103,000 in December, according to a Reuters poll.

* Productivity increased at an annual rate of 2.6 percent, the Labor Department said, after rising at an upwardly revised 2.4 percent growth pace.

* Analysts surveyed by Reuters had forecast productivity, a measure of hourly output per worker that is viewed as an indicator of the economy's vitality or lack of it, rising at a 2 percent rate in the fourth quarter from a previously reported 2.3 percent pace.

COMMENTS:

ERIC GREEN, CHIEF OF U.S. RATES RESEARCH AND STRATEGY, TD SECURITIES, NEW YORK:

JOBLESS CLAIMS: The claims data was stronger than expected falling from 457,000 to 415,000, better than the market expected. The last week of the month resumed a more familiar trend, one interrupted by weather over the past two weeks. The number came in below the four-week moving average which was 429,000 and claims are poised to move below 400,000 in short order. Indeed the layoff data from Challenger posted the lowest layoff rate for a January in 18 years and the broader trend is for more rather than less jobs. Much of this was priced in the market with yields on the high end of the range and on the cusp of breaking higher in yield. That may come tomorrow should payrolls come in stronger than market expectations, which is our core view.

PRODUCTIVITY: The productivity data is more important than claims today. Yes jobs are improving and so is the outlook, but the productivity data is decidedly non inflationary. It was stronger than expected and unit labor costs, expected to rise 0.2 percent, fell 0.6 percent. Suffice to say that the trough in labor costs and margin expansion is set, something that reinforces our view that disinflation is dead.

However, a look at the corporate price deflator reinforces our view that there remains no cost push inflation pressures. With profits holding as the dominant contributor to the price deflator, pressure to raise prices even against surging commodity prices is simply not there.

THEODORE LITTLETON, ECONOMIST AT IFR ECONOMICS, A UNIT OF THOMSON REUTERS:

Year-end volatility in seasonal adjustment factors and terrible weather have jerked the series up and down in recent weeks, but at least the seasonal factors will now settle down, changing considerably less in weeks ahead and giving us an opportunity to get a clean read on the underlying trend, weather permitting. If this week's figure is accurate, claims remain on a slow but perceptible downward trend, nearing the 400k mark that is traditionally associated with a declining unemployment rate (though the significant fluctuations of the cycle may have altered that threshold).

FRANK LESH, FUTURES ANALYST AND BROKER, FUTUREPATH TRADING LLC, CHICAGO:

(Claims) were around expectations, but really everybody now wants to see this thing below 400,000. For a while it was 450,000 -- we were stuck around 450,000 but now everybody wants to see it below 400,000. Hey, it's an improvement, it's getting better, but not quite as fast as we'd all like it.

JEOFF HALL, ECONOMIST, IFR ECONOMICS, A UNIT OF THOMSON REUTERS:

The better-than-expected productivity gain and the fall in unit labor costs bode well for inflation but suggest hiring will remain muted as the economic recovery hastens.

RUDY NARVAS, SENIOR ECONOMIST, SOCIETE GENERALE, NEW YORK:

JOBLESS CLAIMS: It is trending downward, but we are still waiting for the weekly number to go and stay below 400,000 for a sustained period. This is showing the labor market is recovering but not at a pace that will keep the Fed from its accommodative stand.

PRODUCTIVITY: The numbers are surprising especially with the drop in unit labor costs. This suggest companies can still squeeze out more productivity rather than hire more workers.

NICHOLAS COLAS, CHIEF MARKET STRATEGIST AT THE CONVERGEX GROUP IN NEW YORK:

Claims looked a little better, which is good news, especially coming after last week. But I personally think that expectations for tomorrow's payroll number are still ahead of themselves. This week was OK but last week was tough, so we're still not seeing the kind of pick-up in hiring that you'd need to see to lower the unemployment rate. So I have low expectations for tomorrow.

MARKET REACTION: STOCKS: U.S. stock index futures slightly trim losses after the data. BONDS: U.S. bond prices briefly extend losses. FOREX: The euro extended losses versus the dollar.

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