The number of U.S. workers filing for jobless benefits fell last week, but a surprise decline in January pending home sales contracts to a 10-month low underscored the slow 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. That was in line with market expectations.

A separate report from a Realtors group showed pending sales of existing homes dropped 7.6 percent in January to their lowest since March last year. Markets had expected pending home sales, which lead existing home sales by a month or two, to rise 1 percent.

I take January and February pending sales data with a grain of salt because of issues like the weather. However, I think this shows that housing will remain in the doldrums for a while, said James Meyer, chief investment officer at Tower Bridge Advisers in West Conshohocken, Pennsylvania.

The National Association of Realtors warned that pending home sales contracts could fall again in February because of bad weather.

U.S. stock indexes held gains, while Treasury debt prices pared losses. The U.S. dollar slipped against the yen.

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.

Initial claims data in recent weeks has been distorted by inclement weather, but a Labor Department official said there were no special factors for the latest numbers.

Severe snowstorms hammered much of the country last month, keeping some workers at home. That will act as a drag on the February jobs report.

According to a Reuters survey, nonfarm payrolls are forecast to have fallen 50,000 last month after slipping 20,000 in January.

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 later this year.

SIGNS OF IMPROVEMENT

Reports ranging from consumer spending to manufacturing activity this week suggested the 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 orders received by U.S. factories rose 1.7 percent in January after a 1.5 percent increase in December.

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

The increase in productivity, which measures hourly output per worker, was above market expectations for a 6.3 percent rate. Some analysts believe companies cannot continue to boost output without starting to hire new workers.

However, others reckon companies will hold off new hires, while gauging the strength of the economic 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 more steeply than previously thought in the fourth quarter. Costs fell 5.9 percent instead of 4.4 percent, after declining 7.6 percent in the third quarter.

Compared to a year ago, unit labor costs were down a record 4.7 percent. This should allow the U.S. central bank to honor its pledge to keep 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 -- which irons out week-to-week volatility -- falling 3,500 to 470,750.

The number of people still receiving benefits after an initial week of aid dropped 134,000 to 4.5 million in the week ended February 20, the lowest since early January 2009. This measure peaked in June last year and has been steadily declining.

(Additional reporting by Doug Palmer and Corbett Daly; Editing by Andrea Ricci)

Pennsylvania Unemployment