New claims for unemployment benefits unexpectedly rose last week to the highest level since early April, highlighting a weak labor market and the fragile economic recovery.

Weekly claims data are often volatile and the figures released on Thursday by the Labor Department have little bearing on the government's closely watched monthly employment report, due on Friday, as they fall outside the survey period.

Still, they are indicative of a labor market that is struggling to gain momentum, putting a strain on the broader economy's recovery from its longest and deepest downturn since the Great Depression.

While these numbers are volatile, we haven't really made progress in the labor market and that's kind of troubling when you think about the broader economic recovery, said Andrew Gledhill, an economist at Moody's Economy.com in West Chester, Pennsylvania.

For the recovery to turn into a self-sustaining expansion, we need people to have wage income coming in and until that happens, we are still in a tenuous position.

Initial claims for state unemployment benefits rose 19,000 to a seasonally adjusted 479,000, the Labor Department said. That compared to market expectations for a drop to 455,000.

The surprise rise in jobless claims and below forecast sales from domestic retailers pulled down U.S. stock indexes. Prices for safe-haven U.S. government bonds rose, while the dollar fell against the Japanese yen.

The government, according to a Reuters poll, is expected to report on Friday that nonfarm payrolls fell 65,000 last month after declining 125,000 in June as temporary workers hired to conduct the decennial census were let go.

Private-sector payrolls are seen rising a modest 90,000 and the unemployment rate is expected to climb to 9.6 percent from 9.5 percent in June.

THE ECONOMY IS A CAMPAIGN ISSUE

This will be unwelcome news for President Barack Obama, whose popularity has tumbled amid growing unhappiness over the health of the economy, which is the top campaign issue for the November mid-term elections.

Obama on Thursday defended his policies and said the economy still needed more time to heal.

We've gone through a very, very difficult time. Our economy is not yet where it needs to be, Obama told workers at a Ford assembly plant in Chicago. It's going to take more time to heal from all the damage that was done. We are headed in the right direction.

The sluggish pace of economic growth threatens to keep unemployment high for months, posing trouble for Democrats hoping to retain their congressional majorities.

Growth slowed to a 2.4 percent annual rate in the second quarter after expanding at a 3.7 percent pace in the first three months of this year.

After falling rapidly in 2009, jobless claims have stalled this year and are anchored above the 400,000 to 450,000 range that analysts say is normally associated with sustainable jobs growth.

The rise in initial claims is a disturbing sign that hiring remains depressed, wrote economists at Goldman Sachs.

The four-week average of new jobless claims, considered a better measure of underlying labor market trends, rose 5,250 to 458,500.

Stubbornly high unemployment is causing households to become more frugal, forcing retailers to slash prices in a bid to attract shoppers.

Twenty-eight retailers tracked by Thomson Reuters reported a 2.9 percent rise in July sales at stores open at least one year, missing Wall Street forecasts of 3.1 percent. Of those, 17 reported lower-than-expected sales, while nine beat estimates.

While the number of people still receiving unemployment benefits after an initial week of aid fell to 4.54 million in the week ended July 24, it was likely a reflection of people dropping off benefits rolls rather than finding jobs.

The number of people on emergency benefits increased to 3.31 million in the week ended July 17. Congress restored aid to about 2.5 million unemployed Americans, whose benefits had lapsed in May. The benefits, which were extended until November, were renewed retroactively to June 2.

We are likely to see some pick up in the number of extended and emergency claims in the short term, however, there are still large numbers of people who are reaching the maximum 99 weeks of benefits, said Yelena Shulyatyeva, an economist at BNP Paribas in New York.

(Additional reporting by Alister Bull; Editing by Neil Stempleman)

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