The number of U.S. workers filing new claims for jobless aid 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.

The report came a day before the release of the government's employment report for December, which a Reuters survey predicted would show 8,000 jobs were lost, the fewest since the economy tumbled into recession two years ago.

The steady decline in initial jobless claims suggests that job losses are rapidly coming to an end. said Julia Coronado, an economist at BNP Paribas in New York who expects payrolls increased 25,000 last month.

U.S. stocks opened slightly lower, while Treasury debt prices dipped slightly after the jobless claims data was released.

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.

Based on reports of 15 retailers out of 30 tracked by Thomson Reuters Data, 62 percent posted better-than-expected sales results for stores open at least a year.

STRONG HEALING SIGNS

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

The improving labor market tone was underscored by a drop in the four-week moving average for new claims last week to the lowest level since mid-September 2008.

The average, viewed as a better measure of underlying trends, dropped 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 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.

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.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)

Unemployment