The number of U.S. workers filing for jobless benefits fell last week, but a surprise drop in pending home sales to a 10-month low in January underscored the uneven nature of the economic recovery.

Initial claims for state unemployment benefits dropped 29,000 to a seasonally adjusted 469,000, the Labor Department said on Thursday, in line with market expectations.

Separately, a trade group said pending sales of previously owned homes dropped 7.6 percent in January to their lowest since March last year. Analysts had expected a 1 percent rise.

We expect the economic recovery to be gradual and uneven. Considering the severity of the recession we are coming out of, it's not surprising we are hitting a few bumps, said Ryan Sweet, an economist at Moody's Economy.com in West Chester, Pennsylvania.

Stocks ended higher as the weak housing report was offset by the jobless claims data and solid February retail sales. Prices for shorter-dated Treasury debt fell, while the dollar rose broadly.

U.S. retailers posted their strongest monthly sales performance last month since before the start of the recession in December 2007 as leaner inventories allowed for more sales at full price. This should bode well for overall retail sales in February.

The claims data, which came a day before the release of the government's closely watched employment report for February, offered hope that job growth remained in sight.

However, they did not provide a signal on the Friday report, which is expected to show a big loss of jobs due to major snowstorms that hammered much of the country last month.

According to a Reuters survey, U.S. nonfarm payrolls are forecast to have fallen 50,000 last month after slipping 20,000 in January. The median forecast from the 20 most accurate forecasters also sees payrolls falling by 50,000 while the 10 most accurate economists predict a 70,000 decline.

The labor market is being anxiously watched to see whether the economy's recovery from the worst downturn since the 1930s will be sustained when support from government stimulus and the rebuilding of inventories fade this year.

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President Barack Obama has made tackling unemployment his number one priority since he and fellow Democrats fear voter backlash in November congressional elections if no progress is made in reducing it.

Congress this week extended jobless benefits for 400,000 people who otherwise would have exhausted them in coming weeks. A recent spike in jobless claims had given rise to fears the labor recovery could be stalling, but that was largely allayed by the latest drop.

Reports on consumer spending and manufacturing this week suggested the economic recovery remained on course, with the jobs picture steadily improving.

Anecdotal and statistical evidence in February suggest the labor market continues to improve on an underlying basis, said Omair Sharif, an economist at RBS in Stamford, Connecticut. Though the weather may have depressed the jobs figures in February, we continue to expect healthy payroll growth in the coming months.

A separate report from the Commerce Department showed U.S. factory orders rose 1.7 percent in January on top of a 1.5 percent December rise, indicating the recovery in manufacturing was becoming entrenched.

Even as the economy buckled from the downturn, nonfarm productivity rose at a brisk 6.9 percent annual rate in the fourth quarter, a second Labor Department report showed, rather than the 6.2 percent pace estimated last month.

Some analysts believe companies cannot continue to boost output without starting to hire new workers. Others reckon companies will hold off new hires while gauging the strength of the recovery and instead opt to extend working hours and make temporary workers permanent staff.

Firing activity has largely tapered off but new hiring has yet to pick up. Firms are still squeezing productivity out of the current workforce and are reluctant to add new hires, said Zach Pandl, an economist at Nomura Securities International in New York.

Unit labor costs, a gauge of inflation and profit pressures closely watched by the Federal Reserve, fell a sharp 5.9 percent in the fourth quarter, more than initially estimated.

Compared to a year earlier, unit labor costs were down a record 4.7 percent. This should help the Fed -- the U.S. central bank -- to honor its pledge to keep benchmark interest rates at ultra-low levels for a while to nurture the recovery.

There were other encouraging signs in the claims report, with the four-week moving average of new claims falling to 470,750. The number of people still receiving benefits after an initial week of aid dropped to 4.5 million in the week ended February 20, the lowest since early January 2009.

(Additional reporting by Doug Palmer and Corbett Daly; Editing by James Dalgleish)

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