The number of U.S. workers filing new applications for unemployment insurance unexpectedly surged last week, while producer prices increased sharply in January, raising potential hurdles for the economy's recovery.

Initial claims for state jobless benefits increased 31,000 to 473,000, the Labor Department said on Thursday. Financial markets had expected them to fall slightly.

Another report from the department showed prices paid at the farm and factory gate rose a faster-than-expected 1.4 percent from December as higher gasoline prices and unusually cold temperatures helped boost energy costs.

The jobs picture is still weak, said Jennifer Lee, a senior economist with BMO Capital Markets in Toronto. It will be a while yet before we can get decent, sustained job growth. And until then, prices will also remain in check, although there are some pressures building in the pipeline.

The disappointing weekly claims and producer inflation data were offset by reports showing stronger gains in regional manufacturing activity and a 10th straight monthly rise in a gauge of the economy's prospects.

The Philadelphia Federal Reserve's business activity index rose to 17.6 in February from 15.2 the prior month, while the Conference Board's index of leading economic indicators rose 0.3 percent last month after a 1.2 percent gain in December.

U.S. stock indexes were up marginally, while the U.S. dollar fell on the weak claims report. Government debt prices dropped on the inflation report.

Last week was the survey week for the employment report for February, which is scheduled for release in early next month, and analysts fear it could disappoint.

The labor market, hard hit by the downturn, has lagged the economic recovery that started in the second half of 2009. The economy has lost 8.4 million jobs since the start of the recession in December 2007.

Concerns about employment affected sales at Wal-Mart during the holiday quarter and the world's largest retailer said sales in the United States would be more challenging in the first quarter.

PPI MAY FAN INFLATION FEARS

The PPI report may fan worries about inflation pressures, which have largely been contained by excess capacity at factories and a weak labor market.

The bottom line is that the Fed is going to have some decisions to make at its next meeting, since it seems inflation is now back on the table, said Alan Lancz, president at Alan B. Lancz & Associates Inc in Toledo, Ohio.

Fed officials, keeping an eye on how quickly the recovering economy absorbs the excess slack that built up during the recession, have said they are likely to keep interest rates extraordinarily low for an extended period.

About three-fourths of the increase in PPI last month was due to a 5.1 percent jump in prices for energy goods, the department said. Energy costs were pushed up by a spike in prices for gasoline, liquefied petroleum and home heating oil.

Stripping out the volatile food and energy costs, core producer prices rose a faster than expected 0.3 percent last month after being flat in December. The core index, which had been forecast to rise 0.1 percent, was lifted by a surge light motor truck and pharmaceutical prices.

It does present some upside risks to our call for only modest gains in CPI and also points to some possible upward price pressures in the pipeline, Millan Mulraine, an economics strategist at TD Securities in Toronto.

The department on Friday will release its consumer price report for January. Headline CPI is seen rising 0.3 percent from December and core CPI gaining 0.1 percent, according to a Reuters survey.

In the claims report, the four-week moving average of new claims, which irons out week-to-week volatility, fell 1,500 to 467,500, the Labor Department said. The number of people still receiving for benefits after an initial week of aid was unchanged at 4.56 million in the week ended February 6. For a graphic on new jobless claims, see: http://link.reuters.com/wug22j For a graphic on U.S. producer prices, see: http://link.reuters.com/vug22j

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)

Inflation Price Consumer price index