New claims for unemployment benefits fell last week to their lowest level in more than 2-1/2 years, signaling an acceleration in job creation could be under way.

The labor market outlook was also enhanced by another report on Thursday showing steady productivity growth in the fourth quarter, implying that employers might be forced to step-up hiring to meet growing demand.

Initial claims for state unemployment benefits dropped 20,000 to a seasonally adjusted 368,000, the lowest since May 2008, the Labor Department said. Economists had forecast claims rising to 398,000.

The downward trend in claims suggests that the labor market is getting back to health, said Krishen Rangasamy, an economist at CIBC World Markets in Toronto.

Stock index futures rallied on the data, while prices for government debt extended losses. The dollar rose against the yen.

The claims data falls outside the survey period for the government's closely watched employment report for February due for release on Friday. Nonfarm payrolls probably increased 185,000 after snowstorms depressed growth to a paltry 36,000 jobs in January, according to a Reuters survey.

Declining claims suggest the economic recovery is gaining traction and fewer layoffs should help it weather rising crude oil prices.

Reports from U.S. retailers on Wednesday suggested consumers so far were withstanding a sharp rise in gasoline prices. Costco Wholesale Club , teen apparel retailer Zumiez and other chains reported February sales results that beat Wall Street's expectations.

CLAIMS BELOW KEY LEVEL

Claims have now held below the 400,000 threshold for a second straight week. Claims below that level are widely viewed as signaling strong jobs growth and economists believe it is only a matter of time before this is reflected in the payrolls numbers.

A Labor Department official said there was nothing unusual in the state level data, adding that no states were estimated.

The four-week moving average of unemployment claims -- a better measure of underlying trends - dropped 12,750 to 388,500 last week, the lowest since July 2008.

In a second report, the department said nonfarm productivity increased at an unrevised 2.6 percent annual rate in the fourth quarter, in line with economists' expectations.

Productivity, a measure of hourly output per worker, grew at a 2.3 percent pace in the third quarter.

Productivity grew rapidly as the economy emerged from the worst recession since the Great Depression of the 1930s, peaking at an 8.9 percent rate in the second quarter of 2009 as businesses slashed costs by relying on a small pool of workers.

The pace is slowing, which economists say will compel businesses to soon add more workers to expand production.

They are not going to be able to squeeze as much out of their current workforce as they were in the past, said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

Unit labor costs, a gauge of potential inflation pressures closely watched by the Federal Reserve, fell at an unrevised 0.6 percent rate. Labor costs edged up 0.1 percent rate in the third quarter.

Depressed unit labor costs will help to keep inflation pressures contained at a time when rising oil prices are pushing up input costs for many businesses.

Economists had expected unit labor costs to drop at a 0.5 percent rate in the fourth quarter. For the whole of 2010, unit labor costs fell 1.5 percent after declining 1.6 percent in 2009.

(Reporting by Lucia Mutikani, Editing by Andrea Ricci)

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