New claims for state jobless benefits unexpectedly rose last week for the first time since early April, suggesting the labor market recovery may have hit a speed bump.

While data on Thursday also showed manufacturing activity rose in the nation's mid-Atlantic region in May, new orders and employment slipped. A separate gauge of the economy's prospects dipped for the first time in 13 months in April.

The reports showed more weakness than financial markets expected and contributed to a selloff on Wall Street, but analysts said the economy's recovery was largely on track.

There are worries that the market turmoil will eventually trigger some weakness in the economic performance, but to date I don't really see that. What we are seeing in the data is pretty steady decent rates of growth, said Stephen Gallagher, chief U.S. economist at Societe Generale in New York.

Federal Reserve Governor Daniel Tarullo warned Europe's debt troubles, if not contained, could cause financial markets to freeze and spark a global crisis akin to the market meltdown of late 2008.

Initial claims for state jobless benefits increased 25,000 last week to 471,000, the highest level in five weeks, the Labor Department said. Markets had expected a drop to 440,000.

The claims data fell in the survey week for the government's closely watched employment report for May, and would normally be seen as suggesting weak jobs growth.

However, some analysts said the relationship between claims and payrolls had weakened, and they continued to look for a healthy pace of job creation in May.

There hasn't been a particularly close relationship, we still expect employment growth to be fairly brisk in May. But there is a bit of a downside risk given the number this morning, said Peter Newland, an economist at Barclays Capital in New York.

Separately, the Philadelphia Federal Reserve Bank said its index of mid-Atlantic business activity rose to 21.4 from April's 20.2, a touch below market expectations for 22.0. A reading above zero indicates expansion in manufacturing.

Subindexes, however, showed weakness in employment and new orders.

In a third report, the Conference Board said its index of U.S. leading economic indicators, which aims to gauge the economy's future strength, slipped 0.1 percent last month, surprising analysts who had looked for a 0.2 percent gain.

It was the first drop since March 2009.

STOCKS TUMBLE

The reports added to pressure on U.S. stocks, already reeling on concerns Europe's debt crisis could hold back the domestic economy's recovery as governments in Europe cut spending. Major indices ended down more than 3 percent.

The Standard & Poor's 500 index <.SPX> is now down over 10 percent from its April's closing high, indicating a correction and marking the most significant break in the rally from March 2009's 12-year low.

Prices for U.S. government debt rallied, with the yield on the benchmark 10-year note touching a 5-1/2 month low. The U.S. dollar fell sharply versus the yen.

The debt crisis, stemming from Greece's fiscal troubles, pushed consumer confidence in the euro zone to a seven-month low in May.

Though analysts remain optimistic about the U.S. economy's recovery from the worst recession since the 1930s, they worry a prolonged decline in share prices could curb consumer spending, which rebounded strongly in the first quarter.

The stock market has a fairly strong relationship with consumer spending in the U.S., so a sustained drop in the stock market could lead us to soften our forecast for consumer spending, we are not at that stage yet, said Newland.

The Fed's quarterly central tendency forecasts released on Wednesday showed greater optimism on the U.S. growth outlook among policymakers, who predicted gross domestic product would rise around 3.2 percent to 3.7 percent this year.

But the manufacturing-led recovery has been plagued by stubbornly high unemployment, creating a political headache for President Barack Obama and his fellow Democrats. The near 10 percent unemployment rate could cost the Democratic Party its majorities in both houses of Congress in November's elections.

New applications for unemployment benefits have been falling only slowly, even though payrolls have now grown for four straight months. Analysts believe this implies only a gradual improvement in the jobless rate once it peaks.

But there was some good news in the claims report. The number of people still receiving benefits after an initial week of aid fell to its lowest level in since late March in the week ended May 8. And for the first time since November 2009, the number of people receiving benefits fell below 10 million.

The ongoing reduction in the total number of benefit recipients is consistent with continued hiring, wrote economists at Goldman Sachs.

(Additional reporting by Pedro Nicolaci da Costa and Burton Frierson, Editing by Chizu Nomiyama)

Unemployment