The number of Americans signing up for unemployment benefits (search) fell more steeply than expected last week, a government report showed on Thursday, reinforcing market perceptions of a buoyant labor market.

First-time claims for state unemployment insurance aid dropped 11,000 in the week ended July 17 to 339,000, down from a revised 350,000 in the prior week and well below the 394,000 for the same period a year ago, the Labor Department (search) said.

The drop brought claims below the 345,000 forecast by analysts in a Reuters poll. The Labor Department had originally reported 349,000 new claims in the previous week.

U.S. Treasury yields rose after the drop in claims, while the dollar climbed moderately on the sharper-than-expected drop in claims.

"The latest drop by initial state jobless claims suggests that (Federal Reserve (search) Chairman) Alan Greenspan's (search) optimism was warranted, and that the U.S. economy will regain momentum in the third quarter," said John Lonski, chief economist for Moody's Investors Service in New York.

In testimony before congressional panels this week, Greenspan said: "There have been much clearer indications over recent months that conditions in the labor market are improving."

The fall in initial claims nudged the indicator's closely watched four-week average, which economists say provides a clearer picture of the jobless trend because it irons out weekly volatility, to 336,750, down from 339,250 the prior week.

The number of people who already qualify for benefits and remain on the jobless rolls fell to the lowest level in more than three years.

So-called continued claims fell 167,000 to 2.80 million in the week ended July 10, the latest period for which the figures were available. That was the lowest since 2.78 million in the week ended May 12, 2001, and largest weekly decline since 212,000 in the Nov. 24, 2001, week.

"The continuing claims dropped substantially. That's a clear indication that they are dropping out of the unemployment pool — either they found jobs (or) they ran out of benefit, which is the bad way. But I think it's the good way," said Ken Mayland, president of ClearView Economics.

The Labor Department attributed the weekly decline in the continued claims numbers to seasonal factors misreading when the annual summer automobile plants shut down earlier this month.

While claims figures were volatile through the first half of this year, the overall trend has been down.

The number of Americans who applied for initial benefits in the first 26 weeks of 2004 averaged about 347,000, well below the 417,00 average for the same 26-week run a year ago.

U.S. hiring has shown a corresponding pick-up, with nonfarm payrolls rising 1.3 million in the first six months of this year.