The number of Americans claiming new jobless benefits fell to a four-month low last week, a sliver of hope for an economy battered for days by a credit rating downgrade and falling share prices.

The jobless claims data released by the Labor Department on Thursday eased concerns that the economy was heading back into recession, as feared by investors, and sparked a rally on Wall Street that lifted stocks 4 to 4.7 percent.

Initial claims for state unemployment benefits fell 7,000 to a seasonally adjusted 395,000, the Labor Department said, the lowest level since early April. Economists had expected a reading of 400,000.

We are not necessarily on the verge of another dip in economic activity, said Millan Mulraine, a senior macro strategist at TD Securities in New York.

The level of claims at this point is more consistent with at least no deterioration in labor market conditions and at best an economy that is adding jobs at about 200,000 (a month).

However, the optimism generated by the claims report was dampened somewhat by a jump in the trade deficit to $53.1 billion in June, the largest since October 2008, from $50.8 billion in May.

As a result of the wider trade shortfall, economists estimated the second-quarter's already weak annual growth pace of 1.3 percent could be revised to 0.9 percent.

The government will release its second estimate for second-quarter gross domestic product on August 26. The economy grew at a 0.4 percent rate in the first quarter.

The Federal Reserve said on Tuesday that economic growth was considerably weaker than expected and unemployment would fall only gradually. The U.S. central bank promised to keep interest rates near zero until at least mid-2013.

Hiring accelerated in July after abruptly slowing in the previous two months. However, there are worries that a sharp sell-off in stocks and the nasty fight between Democrats and Republicans over raising the government's debt ceiling could dampen employers' enthusiasm to hire new workers.

It is possible that the risk aversion manifested in financial markets will spill over to hiring. However, the data in hand don't yet reflect such a dynamic, said Julia Coronado, chief North America economist at BNP Paribas in New York.

DOWNWARD TREND IN CLAIMS

President Barack Obama on Thursday renewed a call for an extension of a payroll tax cut and pressed Congress to pass legislation that would increase investment in the nation's aging infrastructure and boost exports.

Over the coming weeks I am going to be putting out more proposals, week by week that will help businesses hire and put people back to work, Obama told workers at a battery plant in Michigan. I am going to keep at it until every single American who wants a job can find one.

About 13.9 million Americans are unemployed.

Stocks have dropped sharply in recent weeks on fears of a new recession, exacerbated by Standard & Poor's decision to strip the United States' top notch AAA crediting rating last Friday.

A sovereign debt crisis in Europe has also not helped.

But U.S. stocks rallied on Thursday, boosted by the jobless claims report and solid earnings from Cisco Systems. Sentiment was also fueled by department store chain Kohl's Corp raising its full-year profit forecast.

Prices for Treasury debt fell and the market suffered its worst long bond auction in 2-1/2 years. The dollar was flat against a basket of currencies.

Economists remain cautiously optimistic that the world's largest economy will avoid a double-dip recession, citing declining energy prices and the unwinding of supply chain disruptions from the earthquake in Japan.

An increase in the volume of oil imports pushed the monthly oil import bill in June to its highest since August 2008. That and the second straight month of declines in exports contributed to the month's wider trade deficit.

Imports from China rose nearly 5 percent to $34.4 billion, lifting the closely watched trade gap with that country to $26.7 billion, the highest in 10 months.

U.S. exports fell for a second consecutive month, to $170.9 billion, as shipments to Canada, Mexico, Brazil, Central America, France, China and Japan all declined.

The sharp drop in exports is a major concern for the economic outlook as it is an indication that the pace of global activity may be slowing appreciably, said TD Securities' Mulraine.

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