The number of U.S. workers filing new claims for jobless benefits fell last week, but a surprise drop in sales of existing homes in August suggested the economy's recovery from a severe recession would be slow.

A report from the Labor Department on Thursday showed new claims for unemployment benefits unexpectedly fell 21,000 to a seasonally adjusted 530,000 last week. Analysts polled by Reuters had expected initial claims to rise to 550,000.

Separately, the National Association of Realtors said sales of existing homes fell 2.7 percent to an annual rate of 5.10 million units from 5.24 million units in July. That compared to market expectations for a rise to a 5.35 million unit pace.

The report, however, did little to change views the economy is recovering from its worst recession in 70 years. The Federal Reserve -- the U.S. central bank -- on Wednesday acknowledged activity had picked up and noted the improvement in the housing sector when it left its key overnight lending rate near zero.

U.S. stock indexes erased gains after the release of the housing data, falling into negative territory, while prices of government bonds, a haven in times of economic turmoil, rose.

NAR Chief Economist Lawrence Yun described the decline as a mild retreat after a strong gain in July, adding that the August pace was the second-highest in 23 months. Compared to August last year, however, sales were up 3.4 percent.

Some of the give-back in closed sales appears to result from rising numbers of contracts entering the system, with some fallouts and backlogs contributing to a longer closing process, Yun told reporters.

The national median home price was $177,700 in August, down 12.5 percent from August last year. Distressed properties, which accounted for 31 percent of sales in August, continue to distort prices, the NAR said.

The inventory of existing homes for sale in August fell 10.8 percent to 3.62 million units from July, the NAR said. August's sales pace left the supply of unsold homes on the market at 8.5 months, down from 9.3 months' worth in July.

A government tax credit for first-time buyers and an improving economic picture, coupled with the lowest prices and mortgage rates in decades are helping the housing market to dig itself out of a three-year slump.

There's probably some good news in that even though sales were a bit weaker the supply came down pretty meaningfully from 9.3 to 8.5 months, so continuing to make our way back to a bit more balanced number, said Keith Hembre, chief economist at First American Funds in Minneapolis, Minnesota.

Stubbornly high unemployment, however, continues to cast a pall over the strength of the economic recovery, which many economists agree is already under way.

While fewer workers submitted applications for unemployment benefits last week, analysts said initial claims had to fall below 500,000 to signal a recovery in the labor market.

The labor market is stabilizing. We're not quite down to the level that would signal that the economy is creating more jobs than it is losing, but we could reach that point later this year or early next year, said Gary Thayer, macrostrategist at Wells Fargo Advisors in St. Louis, Missouri.

The four-week moving average of new claims -- considered a better gauge of labor market trends -- dipped to 553,500, the lowest since late January, the Labor Department said. The number of workers continuing to draw unemployment aid after an initial week of benefits fell 123,000 to 6.138 million in the week ending September 12.

For a graphic on existing home sales, click on http ://graphics.thomsonreuters.com/099/US_HOMSLS0909.gif

Unemployment