The number of U.S. workers filing new claims for jobless benefits fell more than expected last week, a government report showed on Thursday, but remained at high levels consistent with a severe recession.

U.S. stock index futures trimmed losses after the report, while government bond prices pared gains.

We had a bit of a drop, but a drop from a high level, so the numbers remain very high. This continues to be a very weak labor market, said David Wyss, chief economist at Standard & Poor's in New York.

The number of people staying on the benefits after drawing an initial week of aid eased by 14,000 to 5.11 million in the week ended February 21, the latest week for which the data is available, from 5.12 million the previous week.

That number remains near record highs, showing the harsh economic environment is making it tough to find new jobs.

Escalating job losses as companies struggle with falling revenues and tight profit margins are further crimping household spending, creating a vicious cycle for the an economy entangled in a recession since December 2007.

Investors are bracing for an ugly February non-farm payrolls report on Friday, which a Reuters survey predicted would show job losses of around 648,000 and the unemployment rate at its highest in a quarter century.

The government is intervening with a $787 billion stimulus package to try and break the economy's alarming downward spiral, but the success of this plan depends on stabilizing the fractured financial system and collapsed housing market.

The insured unemployment rate was 3.8 percent in the week ended February 21, unchanged from the previous week.

The four-week moving average for new claims, considered to be a better gauge of underlying trends as it irons out week-to-week volatility, rose to 641,750 in the week ended February 28 from 639,750 the week before.

WORKERS LESS PRODUCTIVE

In another report, the Labor department said U.S. non-farm productivity fell at a revised 0.4 percent annual rate, sharply below initial estimates of a 3.2 percent advance published last month and 2.2 percent rise in the third quarter.

Output was revised to show a steep 8.7 percent decline in the fourth quarter, the sharpest decline since the first quarter of 1982. It was initially estimated as a 5.5 percent fall. For 2008, productivity rose 2.8 percent, unchanged from last month's estimate.

Unit labor costs, a gauge of inflation and profit pressures closely watched by the Federal Reserve, were revised up to a 5.7 percent increase in the fourth quarter, above Wall Street's estimates for a 3.4 percent increase.

The number of hours worked dropped at an 8.3 percent annual rate during the fourth quarter, the biggest decline since the first quarter of 1975.

WAL-MART SALES UP ON LOWER GAS PRICES

There were some signs that falling gasoline prices were finally translating into stronger consumer spending.

Wal-Mart Stores Inc , the world's biggest retailer, reported much stronger-than-expected February sales at its established stores, while many other big U.S. chains managed to exceed analysts' gloomy forecasts.

We believe falling gas prices significantly boosted household disposable income in February and therefore allowed for both more trips and more spending toward discretionary categories, Wal-Mart's vice chairman, Eduardo Castro-Wright, said in a statement.

(Reporting by Lucia Mutikani, Editing by Neil Stempleman)

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