The number of Americans filing new claims for jobless benefits hit a 3-1/2 year low last week, bolstering views the economy was gaining momentum, even though third-quarter growth was revised down.

Other data on Thursday underscored the firming tone in the economy, with consumer sentiment scaling a six-month high in December and a barometer of future activity rising more than expected last month.

While the economy is wrapping up 2011 with a spring in its step, bickering over budget policy in Washington and the debt crisis in Europe are casting a cloud over its prospects next year.

A payroll tax cut and benefits for the long-term unemployed, both of which are due to expire at year end, has become tangled in partisan politics and it is unclear whether and when they will be renewed.

The economy is carrying some clear momentum into 2012, said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. If Congress doesn't kill that by failing to extend the tax breaks, we can look forward to a better year ahead.

Initial claims for state unemployment benefits dropped 4,000 to a seasonally adjusted 364,000, the Labor Department said on Thursday. That was the lowest level since April 2008.

The claims data, which covered the survey period for the December nonfarm payrolls report, helped to take the sting out of a separate report from the Commerce Department showing that gross domestic product grew at a 1.8 percent annual rate in the third quarter. The December employment report will be released January 6.

Growth, which had previously been reported to have expanded at a 2 percent pace, was held back by a sharp drop in healthcare spending.

However, spending on durable goods was stronger than previously estimated, indicating household appetite to consume remains healthy.

Healthcare spending subtracted about 0.1 percentage point from the GDP change in the final revision, whereas the previous estimate had it adding 0.61 percentage point to growth.

Prospects for consumers have been boosted by the rise in sentiment this month. The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment rose to 69.9 from 64.1 in November.

LABOR MARKET IMPROVING

Stocks on Wall Street rose on the data, along with prices for long-dated U.S. Treasury debt. The dollar was little changed against a basket of currencies.

Even as much of the rest of the world is slowing down and a mild recession is forecast in Europe next year, the U.S. economy remains resilient.

The labor market is improving, households continue to spend, home building is picking up and factory output is expanding, putting the economy on course for at least a 3 percent growth pace in the fourth quarter.

That would be the fastest pace in 18 months.

While claims for unemployment benefits tend to be volatile this time of the year, the third straight week of decline suggested the labor market was gaining some traction.

In addition, the four-week moving average, considered a better measure of labor market trends, dropped to its lowest level since June 2008.

One unexpectedly low number can easily be a fluke; two are interesting; three are telling us something real is happening in the labor market, said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

The drop in claims in recent weeks, if sustained, is consistent with private payrolls growth ramping up to about 200,000 per month.

Other data showed the Conference Board's leading economic index rose 0.5 percent in November after gaining 0.9 percent in October. It was the seventh straight monthly gain in the index.

Despite the downward revision, last quarter's growth is still a step-up from the April-June period's 1.3 percent pace. Part of the pick-up in output during the last quarter reflects a reversal of factors that held back growth earlier in the year.

A jump in gasoline prices had weighed on consumer spending earlier in the year, and supply disruptions from Japan's big earthquake and tsunami in March had curbed auto production.

INVENTORIES FALL

Business inventories dropped $2.0 billion, which sliced off 1.35 percentage points from GDP growth. Inventories had previously been estimated to have declined $8.5 billion.

The drag from inventories was offset by strong business spending, which increased at a 15.7 percent rate, instead of 14.8 percent.

Excluding inventories, the economy grew at a still brisk 3.2 percent rate, revised down from a 3.6 percent pace. Final sales increased at a 1.6 percent pace in the second quarter.

The Commerce Department also said after-tax corporate profits increased at a 2.7 percent rate, revised down from 3.0 percent. After tax profits increased at a 4.3 percent rate in the second quarter.

Export growth was stronger than previously estimated, rising at a 4.7 percent rate instead of 4.3 percent. Imports increased at a much faster 1.2 percent rate rather than 0.5 percent.

The GDP report also showed some inflation pressures in the economy. A price index for personal spending rose at an unrevised 2.3 percent rate in the third quarter.

That compared to a 3.3 percent rate in the second quarter. A core inflation measure, which strips out food and energy costs, rose at a 2.1 percent rate rather than 2.0 percent. The measure -- closely watched by the Federal Reserve -- grew at a 2.3 percent rate in the prior three months

(Additional reporting by Jason Lange in Washington and Julie Haviv in New York,; Editing by Neil Stempleman)

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