Factory activity in the U.S. Mid-Atlantic braked sharply in April and the number of Americans claiming new jobless aid fell less than expected last week, implying the economy was struggling to regain momentum.

In yet another reading on the headwinds facing the economy, U.S. home prices fell 1.6 percent in February from January, according to the index released on Thursday by a regulator, the U.S. Federal Housing Finance Agency. On a year-over-year basis, U.S. home prices fell 5.7 percent in February from the same month in 2010, the agency said.

The Philadelphia Federal Reserve Bank said on Thursday its business activity index fell to 18.5 in April, pulling back from March's 27-year high of 43.4, and worse than market expectations for a reading of 37.

U.S. Treasuries extended gains after the Philly Fed data. The benchmark 10-year U.S. Treasury note was up 7/32 in price, while its yield slipped to 3.39 percent from 3.41 percent late on Wednesday.

On Wall Street. U.S. stock indexes advanced modestly on strong earnings and outlooks, but those gains were limited by the Philly Fed data's indication of regional economic weakness.

Before the stock market's opening bell, a report from the Labor Department showed initial claims for state unemployment benefits fell 13,000 to a seasonally adjusted 403,000, well above economists' expectations for a drop to 392,000.

The data come as the government is expected to report next week that the economy lost momentum in the first half of 2011. According to a Reuters survey, the economy grew at a 2.0 percent annualized rate after a 3.1 percent pace in the last three months of 2010.

It is possible that the disruption to global supply chains stemming from the Japanese disaster played a role, but we doubt that was the primary factor behind the decline, said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

Despite the sharp pullback in April, manufacturing activity in the Mid-Atlantic region remains in expansion mode. Manufacturing has led the economic recovery and the Philadelphia Fed report could indicate some slowdown in the sector.

While jobless claims fell last week, they remained above the key 400,000 level, which is generally associated with steady employment growth.

The claims data covered the survey period for April's nonfarm payrolls report, which will be released in early May. Employers added 216,000 jobs in March, the most in 10 months, and the unemployment rate slipped to a two-year low of 8.8 percent from 8.9 percent.

It gives the impression that the momentum of labor market improvement is a bit disappointing at this point, said Sean Incremona, an economist at 4Cast in New York.

We are still looking at a moderate recovery, so near term, we might have to edge lower some employment calls. I think we are still going to see the recovery sustained.

Another report on Thursday showed the economy continues to expand, even though the growth pace slowed in the first quarter.

The Conference Board's Leading Economic Index rose 0.4 percent in March to 114.1, a larger gain than the 0.2 percent anticipated by economists.

U.S. Treasury debt prices extended gains on the data, while the dollar fell broadly.

The four-week moving average of unemployment claims, a better measure of underlying trends, rose 2,250 to 399,000.

A Labor Department official said three states -- Pennsylvania, Virginia and Alaska -- had been estimated for last week's data, raising the possibility for large revisions next week.

The number of people still receiving benefits under regular state programs after an initial week of aid fell 7,000 to 3.70 million in the week ended April 9, the lowest level since September 2008.

Economists had expected so-called continuing claims to slip to 3.67 million from a previously reported 3.68 million.

The number of people on emergency unemployment benefits dropped 23,693 to 3.53 million in the week ended April 2, the latest week for which data is available. A total of 8.3 million people were claiming unemployment benefits during that period under all programs.

(Reporting by Lucia Mutikani, additional reporting by Lisa Lambert in Washington, Chris Reese and Leah Schnurr in New York; Editing by Padraic Cassidy and Jan Paschal)

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