WASHINGTON - The number of U.S. workers filing new jobless claims edged up by a slim 1,000 last week and a gauge of underlying labor market trends hit a nearly 16-month low, evidence the job market continues to heal.

The Labor Department said on Thursday initial claims for state unemployment benefits rose to 434,000 after declining for two consecutive weeks. Wall Street analysts had expected claims to hit 447,000.

However the four-week moving average, considered a better measure of underlying labor market trends, dropped to the lowest level since mid-September 2008. The average fell for the 18th straight week to 450,250 -- around the level economists associate with labor market stability.

The persistent downtrend evident in these data is encouraging and corroborates our view that the employment situation is turning, said Michelle Girard, a senior economist at RBS in Greenwich, Connecticut.

The report came a day before the release of the government's employment report for December, which a Reuters survey predicted would show no jobs were lost, the best result since the economy tumbled into recession two years ago.

James Bullard, president of the St. Louis Federal Reserve Bank told university students in China the U.S. labor market was improving and the economy was close to the point where the unemployment rate would start to fall.

According to the Reuters survey, the jobless rate likely rose to 10.1 percent last month from 10 percent in November.

The relatively bullish weekly claims report helped to lift the U.S. dollar against the euro and the yen. Dollar strength and weak commodity prices took some edge off U.S. stocks, while prices for U.S. government debt rose.

Investors were also eyeing reports on December sales from U.S. retailers.

Early reports from Sears Holdings Corp, Costco Wholesale Corp, Macy's Inc and others showed sales increasing, suggesting consumer spending was helping give the economy a lift.

STRONG HEALING SIGNS

The pace of layoffs has slowed sharply in recent months as the economy resumed growth after its worst slump in 70 years.

The state of the job market is among the key factors that will determine the timing of the Federal Reserve's first interest rate increase since cutting benchmark overnight borrowing costs to near zero in December 2008. The central bank has vowed to keep them low for an extended period.

Jobless claims do suggest that employment could be set to grow again, and we continue to expect that tomorrow's employment report will show a 40,000 increase in nonfarm payroll employment in December, said Abiel Reinhart, an economist at JPMorgan in New York.

Moderating job losses are helping consumers to keep up with their loan repayments. The American Bankers Association said consumer loan delinquencies dropped in seven categories in the third quarter. It was the first time since 2007 that so many loan categories experienced declines in late payments.

The insured unemployment rate, which measures the percentage of the insured labor force that is jobless, fell to 3.6 percent in the week ended December 26, the lowest since January last year, from 3.8 percent, the Labor Department said.

Despite the encouraging signs, some weakness persists.

The number of workers still collecting benefits after an initial week of aid fell for a third straight week to 4.80 million in the week ended December 26. However, that likely reflected people exhausting their benefits after receiving the regular 26 weeks of aid provided by states.

The number of people receiving extended benefits under special programs rose to 5.44 million from 5.28 million in the week ended December 19, the department said.

(Additional reporting by Karey Wutkowski and Martinne Geller; Editing by Andrew Hay)

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