New claims for U.S. unemployment benefits fell last week, but were still too high to signal a change in fortune for the troubled labor market.

Also underscoring the sputtering economic recovery was a separate government report on Thursday showing non-farm productivity fell more steeply than previously estimated in the second quarter, posting its largest decline since the third quarter of 2006.

Initial claims for state unemployment benefits dropped for a second straight week, slipping 6,000 to a seasonally adjusted 472,000 in the week ended August 28, according to data from the Labor Department. Analysts polled by Reuters had forecast claims edging up to 475,000.

We're still uncomfortably high, given where we are at this juncture of the recovery, but that we're moving toward 400,000 rather than 500,000 is indicative of at least some measure of job creation, said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.

U.S. stock index futures edged higher on the claims data, while Treasury debt prices extended losses. The U.S. dollar was little changed.

Productivity -- a measure of hourly output per worker that is taken as an indicator of the economy's vitality or lack of it -- contracted at an annual rate of 1.8 percent, instead of the previously reported 0.9 percent pace. Analysts had expected productivity to drop at a 1.9 percent pace in the April-June period after increasing at a 3.9 percent rate the first quarter.

Unit labor costs, a gauge of potential inflation pressures closely watched by the Federal Reserve, rose at a 1.1 percent rate rather than the previously estimated 0.2 percent. The increase in unit labor costs was the fastest rate since the fourth quarter of 2008. Unit labor costs fell at 4.6 percent rate in the first three months this year.

RECOVERY UNDER THREAT

The claims data for last week has no impact on Friday's closely watched employment report for August as it falls outside the survey period. However, filings for jobless benefits were elevated last month, suggesting another decline in payrolls.

The government is expected to report on Friday that nonfarm payrolls dropped 100,000 in August, the third straight month of job declines, with private sector employment increasing only 41,000, according to a Reuters survey.

The weak labor market threatens to derail the economy's recovery from the most painful recession since the Great Depression. Growth is losing steam as the boost from a $814 billion government stimulus package and the rebuilding of inventories by businesses fade.

The Fed has acknowledged the slowing recovery pace and minutes of the U.S. central bank's last policy meeting released this week showed the economy's outlook would have to deteriorate appreciably to spur fresh support from the Fed.

Growing unease over the health of the economy is weighing on President Barack Obama's popularity and dimming the Democratic Party's prospects of keeping control of Congress in November's mid-term elections.

While weak data such as home sales and construction activity indicate a further dampening in activity, modest gains in consumer spending and manufacturing have convinced many economists the economy is not double-dipping.

The economy grew at a 1.6 percent annualized rate in the second quarter, slowing markedly from a 3.7 percent pace in the January-March period.

Last week, the four-week average of new jobless claims, considered a better measure of underlying labor market trends, fell 2,500 to 485,500, the Labor Department said.

Claims for unemployment benefits have been stuck at lofty levels for much of this year, which many economists say points to unemployment staying uncomfortably high for some time.

The number of people still receiving benefits after an initial week of aid fell 23,000 to 4.46 million in the week ended August 21 from an upwardly revised 4.48 million the prior week. Analysts polled by Reuters had forecast so-called continuing claims slipping to 4.44 million.

The insured unemployment rate, which measures the percentage of the insured labor force that is jobless, was unchanged at 3.5 percent during that period.

The number of people on emergency benefits fell 281,676 to 4.55 million in the week ended August 14.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)

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