New U.S. claims for jobless benefits fell more than expected last week to their lowest level in two months, offering cautious hope for an economic recovery that had shown signs of fatigue.

In addition, sales at retailers in June were up 3.1 percent, largely in line with expectations and helped by promotions.

The data on Thursday was a relief after a slew of weak reports had left investors fearing a double-dip recession.

I think we are too quick in dismissing the potential for growth in the second half of the year, I don't think it is going to be as weak as earlier thoughts had it, said Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi in New York.

Initial claims for state unemployment benefits dropped 21,000 to 454,000 in the week ended July 3, the Labor Department said. Markets had expected a decline to just 460,000.

The department also said the number of people continuing to receive unemployment benefits in the final week of June was the lowest in seven months.

The report and June sales from several top domestic retailers gave investors some assurance the recovery from the longest and deepest recession since the 1930s remained on track. Stocks on Wall Street rose slightly, while prices for safe-haven government debt fell.

Concerns over the recovery were also calmed by the International Monetary Fund's upgrading of U.S. growth forecasts. However, the IMF said high unemployment and a distressed housing market were constraining growth, and it admitted data had turned weaker in recent weeks.

The outlook has improved in tandem with recovery, but remaining household and financial balance sheet weaknesses -- along with elevated unemployment -- are likely to continue to restrain private spending, the fund said.

JOBS LAGGING RECOVERY

Job growth has lagged the recovery, which started in the second half of 2009. Although layoffs have abated after last year's bloodletting, companies are skeptical of the economy's strength and are reluctant to start hiring workers on a wider scale.

Last month, private hiring increased by 83,000 after rising only 33,000 in May. But total non-farm employment dropped 125,000 as the government laid off 225,000 temporary census workers.

Last week, the four-week average of new jobless claims, seen as a better measure of underlying labor market trends, fell 1,250 to 466,000.

The decline in claims came as General Motors said it would limit its annual summer plant shutdown.

A Labor Department official said there was nothing unusual in the report and stressed they had not received any information from states to suggest General Motor's limited plant closures could have affected the data.

We expect this to have more of an impact in the coming two weeks, said Daniel Silver, an economist at JPMorgan in New York.

General Motors announced last month that nine of its 11 domestic assembly plants would continue operating during the June 28 to July 9 shutdown to meet demand for some models.

Automakers use the summer shutdowns to complete the annual model changeover and support maintenance operations, and this tends to push up applications for unemployment benefits.

In the last week of June, the number of people still receiving jobless benefits after an initial week of aid dropped 224,000 to 4.41 million, the lowest since November. The level was way below market expectations for 4.60 million.

That pulled down the insured unemployment rate, which measures the percentage of the insured labor force that is jobless, to 3.4 percent from 3.6 percent the prior week.

With Congress wrangling over extending aid for the long-term unemployed, the number of people on emergency benefits dropped 367,948 to 4.15 million in the week ended June 19. About 45 percent of the 14.6 million people unemployed in June had been out of work for six months and more.

Analysts worry that if benefits are not extended, this could hurt consumer spending.

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U.S. jobless claims graphic: http://link.reuters.com/taf56m

Insider video for IMF report on US economy:

http://link.reuters.com/jux36m

Same-store sales graphic: http://link.reuters.com/qys55m

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(Additional reporting by David Lawder in Washington and Chris Reese in New York; Editing by Neil Stempleman)

Unemployment