New claims for state jobless benefits fell last week while a closely watched gauge of demand for factory goods rebounded in May, offering assurance the economy's fragile recovery remains intact.

Thursday's data, coming in the wake of reports indicating a moderation in the pace of recovery, suggested the economy was not at risk of slipping back into recession even though it may have lost a step, analysts said.

It takes away some concern at the margin. We're still in a fragile economy, but this probably isn't evidence of a double-dip recession, said Steve Goldman, market strategist at Weeden & Co in Greenwich, Connecticut.

Initial claims for unemployment benefits fell 19,000 to 457,000 last week, the Labor Department said. The fall in claims was the largest since mid-April. Markets had expected claims to come in at 460,000.

In a separate report, the Commerce Department said orders for durable goods excluding transportation equipment rose 0.9 percent last month, reversing April's 0.8 percent decline.

However, a steep drop in the notoriously volatile commercial aircraft component pulled down overall durable goods orders by 1.1 percent -- the first decline in six months.

Investors opted to focus on the drop in overall orders, and with U.S. lawmakers closing in on a historic overhaul of financial regulations, Wall Street stocks fell. All three main U.S. stock indices ended down more than 1 percent.

The U.S. dollar fell against the euro and yen. Prices for U.S. government debt slipped, lifting benchmark yields from one-month lows, as investors took profits on recent gains.

Data on retail sales, employment, home construction and home sales have pointed to an ebb in the economy's strength, but analysts said the recovery still has staying power.

This is what a U-shaped recovery looks like. It's very disappointing because after a strong downturn, you hope for a V-shaped recovery. Housing is moving sideways, it's not a strong recovery, said Kurt Karl, head of economic research at Swiss Re in New York.

STUBBORNLY HIGH UNEMPLOYMENT

The recovery from the longest and deepest downturn since the 1930s is being hamstrung by stubbornly high unemployment. The weak jobs market is holding back demand even though manufacturers continue to ramp up output and businesses have stepped up capital spending.

Last week, the four-week moving average of new claims -- considered a better measure of underlying labor market trends -- fell 1,500 to 462,750. Claims continue to be stuck at stubbornly high levels, implying unemployment will stay elevated for a while.

On Wednesday, the Federal Reserve toned down its assessment of the economy, describing the recovery as proceeding and the labor market as gradually improving. It noted employers remained reluctant to add employees.

The U.S. central bank left overnight lending rates in a zero to 0.25 percent range and renewed its ultra low interest rate pledge.

A near-10 percent unemployment rate is weighing on President Barack Obama's popularity. Unhappiness with the economy could prove costly to the Democratic Party in November's congressional elections, with voters in an anti-incumbent and anti-Washington mood.

Initial claims have been stuck in a fairly tight range of 440,000 to 480,000 for most of this year, suggesting that the pace of improvement in the labor market is perhaps more gradual than the payroll numbers from the first quarter suggested, said Anna Piretti, an economist at BNP Paribas in New York.

Private hiring was fairly strong in the first four months of this year, but slowed sharply in May, according to government data.

While businesses are hesitant to expand their work forces, they continue to make capital investments. Analysts believe business spending will help prop up the economy in the second half of the year, when support from rebuilding of business inventories and government stimulus disappears.

Non-defense capital goods orders excluding aircraft, a proxy for future business spending, rebounded 2.1 percent in May after a 2.7 slide in April, the durable goods report showed. Inventories of durable goods, items meant to last three years or more, were up 0.8 percent, the fifth monthly rise in a row.

Unfilled orders rose 0.2 percent after a 0.4 percent gain in April.

We are likely to see some moderation in some of the sectors as the inventory boost fades in the second half of the year. Business investment in equipment and software is likely to remain one of the strong engines of growth, said Piretti.

(Additional reporting by Mark Felsenthal in Washington and Matthew Lynley in New York; Editing by Andrew Hay and Dan Grebler)

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