New applications for U.S. jobless benefits unexpectedly fell last week to the lowest level in more than 14 months, suggesting a labor market edging toward stability, while productivity was less robust in the third quarter.

Initial claims for state unemployment aid slipped 5,000 to 457,000 from 462,000 in the prior week, the Labor Department said on Thursday. Claims have dropped for five consecutive weeks. Analysts polled by Reuters had forecast claims rising to 480,000.

The labor market is seen as the biggest threat to the economy's recovery from the worst recession since the 1930s.

New filings for jobless aid are being watched for signs of when job losses might bottom and if the economic expansion that started in the third quarter can be sustained.

Now we have had two weeks in a row clearly below 500,000. That is very encouraging. In order to move from net loss of jobs into positive payrolls territory we need to get down to about 400,000 in claims. We are half way there, said Jay Mueller, senior portfolio manager at Wells Capital Management in Milwaukee, Wisconsin.

U.S. stock index futures held gains on the data, while Treasury debt prices extended losses.

In another report, the department said third-quarter non-farm productivity rose at an 8.1 percent annual rate, still the quickest pace since the third quarter of 2003, rather than the 9.5 percent rate predicted last month.

Aggressive cost cutting by businesses has pushed productivity sharply higher over the past months.

That, combined with a surge in profits during the quarter, has convinced analysts that companies may start hiring and help the economy's recovery.

U.S. Treasury Secretary Timothy Geithner on Thursday said the economy was slowly healing. But he told CNBC that given there were still problems in the housing market and credit remained tight, economic problems were far from over.

IMPROVING JOB OUTLOOK

In sign that the battered labor market might be close to turning around, new applications for unemployment benefits have dropped significantly from March's high levels. However they are still above the 400,000 mark that analysts say would signal payrolls growth.

The four-week moving average for new claims fell to 481,250 last week, the lowest level since November last year and declining for the 13th straight week, Labor Department data showed.

The four-week moving average is considered a better gauge of underlying trends as it irons out week-to-week volatility.

The fact that the claims not only remained low, but decreased further is a very strong sign that labor market conditions are in fact improving and we are not seeing statistical aberrations here, said Zach Pandl, an economist at Nomura Securities in New York.

Government employment data on Friday is expected show that job losses moderated sharply in November and likely support views the deterioration in payrolls is in its final stages. Analysts polled by Reuters forecast U.S. employers cut 130,000 jobs last month after reducing payrolls by 190,000 in October.

The unemployment rate is seen steady at a 26-1/2 year high of 10.2 percent.

However, the data on Thursday showed the number of workers still collecting benefits after an initial week of aid rose 28,000 to 5.47 million in the week ended Nov 21, after declining for 10 straight weeks. This was below market expectations for 5.48 million.

So-called continuing claims are down from a peak of 6.9 million in June.

The productivity report showed companies continue to cut hours worked to cope with sluggish demand. Hours worked fell at a 4.8 percent rate in the third quarter, the department said.

Unit labor costs, a gauge of inflation and profit pressures closely watched by the Federal Reserve, fell 2.5 percent, less than the 5.2 percent previously estimated.

Unit labor costs were flat in the second quarter. They were previously estimated to have dropped 6.1 percent. Analysts had expected the fall in unit labor costs during the third quarter to be revised to show a 4.2 percent drop.

Compensation per hour rose at a faster 5.4 percent pace and, adjusted for inflation, was up 1.8 percent. Hourly compensation had previously been estimated to have risen 3.8 percent.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

Inflation Timothy geithner Unemployment Fall