New U.S. claims for unemployment benefits dropped to a 3-1/2 year low last week, a government report showed on Thursday, suggesting the labor market

recovery was gaining speed.

Initial claims for state unemployment benefits dropped 19,000 to a seasonally adjusted 366,000, the Labor Department said. That was the lowest level since May 2008.

The prior week's claims data was revised up to 385,000 from the previously reported 381,000.

Economists polled by Reuters had forecast claims rising to 390,000 last week.

The unexpected drop in claims last week pushed them closer to the 350,000 mark that analysts say signals labor market strength.

It offered further evidence of increased momentum in the pace of economic activity, even though retail sales rose modestly in November. This is in sharp contrast to Europe, where t he festering debt crisis has already pushed some economies into recession.

The Federal Reserve on Tuesday acknowledged the improvement in the jobs market, but said unemployment remained high. The jobless rate dropped to a 2-1/2 year low of 8.6 percent in Nove mber.

The U.S. central bank said the debt crisis gripping Europe was a big risk to the U.S. economy, which it described as expanding moderately.

A Labor Department official said there was nothing unusual in the state level data and noted that only one state had been estimated.

The four-week moving average of claims, considered a better measure of labor market trends, fell 6,500 to 387,750 -- the lowest since mid-July 2008.

The number of people still receiving benefits under regular state programs after an initial week of aid edged up 4,000 to 3.6 million in the week ended December 3.

Economists had forecast so-called continuing claims rising to 3.63 million from a previously reported 3.58 million.

The number of Americans on emergency unemployment benefits increased 254,642 to 3.05 million in the week ended November 26, the latest week for which data is available.

A total of 7.45 million people were claiming unemployment benefits during that period under all programs, up 874,670 from the prior week.

Unemployment