The number of U.S. workers filing new jobless claims hit a 9-month low last week, and retailers posted their first monthly sales gain in over a year, easing fears recovery from recession would be unsustainable.

The Labor Department on Thursday said first-time applications for unemployment benefits dropped 33,000 to a seasonally adjusted 521,000 last week, the lowest level since early January. That was below market expectations for 540,000.

Separately, September sales at major domestic retailers showed the first monthly increase since August 2008. It was a sign consumer spending has started to recover and the economy was growing again after the worst recession in 70 years.

The labor market is improving, but rather slowly, said Cary Leahey, economist at Decision Economics in New York. Both the initial and continuing claims numbers suggest that October ought to be a better month for payrolls than September.

U.S. stocks ended higher on the claims data and a surprise quarterly profit from Alcoa Inc. Forecast-beating results from major U.S. retailers also buoyed sentiment.

Weak demand for a sale of $12 billion in reopened 30-year U.S. government bonds weighed on Treasury debt prices. The 30-year bond lost over a full point as investors feared appetite for U.S. debt was waning after huge supply.

ECONOMY GROWING AGAIN

The jobless claims report was a relief after data last week showed U.S. employers cut 263,000 jobs in September, far more than the market was expecting.

Data suggests the economy started growing in the third quarter after a recession that started in December 2007, but a persistently weak labor market is casting doubts over the strength and sustainability of recovery.

The unemployment rate rose to 9.8 percent in September, a 26-year high. Economists reckon the Federal Reserve will probably refrain from raising interest rates, currently near zero, until the jobless rate peaks.

Fed officials on Thursday sounded cautiously optimistic notes on the recovery while agreeing it was too soon to withdraw support the U.S. central bank has provided the economy.

High unemployment is undercutting household incomes, and restraining consumer spending, which normally accounts for about 70 percent of U.S. economic activity. But there are signs households may be starting to loosen their purse strings.

U.S. retailers, including Macy's Inc and Abercrombie & Fitch, recorded better-than-expected sales in September, data showed on Thursday.

Based on 30 retailers, sales at stores open at least a year climbed 0.6 percent, versus expectations for a 1.1 percent decline, according to Thomson Reuters data. Nearly 80 percent of them beat expectations.

I think the consumer is dipping their toe back into the discretionary waters right now, but just their toe, said Retail Metrics President Ken Perkins.

Analysts are hoping the gradual improvement of the labor market could encourage consumers to become less frugal.

In a sign the labor market was healing, the four-week moving average for new claims fell 9,000 to 539,750 last week, declining for a fifth straight week.

The average is considered a better gauge of underlying labor market trends as it irons out week-to-week volatility.

The number of people on long-term unemployment benefits fell 72,000 to 6.04 million in the week ended September 26.

It was the lowest since late March and below expectations. The measure has trended down for three consecutive weeks, but that could be because claimants are exhausting benefits.

The insured unemployment rate, the percentage of insured workers who are jobless, eased to 4.5 percent, the lowest since early April, from 4.6 percent in the week ended September 19.

The fall in insured unemployment suggests that overall unemployment is approaching its peak, said Abiel Reinhart, an economist at JP Morgan in New York.

(Additional reporting by Lisa Lambert, Ellen Freilich and Jessica Wohl; Editing by Andrew Hay)

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