The U.S. trade deficit (search) narrowed unexpectedly in March to $55 billion, the largest drop in over three years as exports rose to a record and imports from China declined, a government report showed on Wednesday.

The 9.2 percent plunge in the deficit defied Wall Street forecasts and prompted analysts to raise their estimates of first-quarter U.S. economic growth. But there was substantial doubt the improvement in the trade gap would last.

"This is a big surprise," said Jason Schenker, an economist with Wachovia Corp. in Charlotte, North Carolina. "It could have an impact of raising GDP first quarter from about 3.1 percent to 3.9 percent ... a very significant change."

Analysts had expected high oil prices and a flood of clothing from China to push the monthly trade gap to around $61.5 billion, which would have been a new record.

The trade data boosted the dollar against major currencies. The euro dropped against the dollar, and in the late afternoon was trading at about $1.2814 compared with $1.2875 shortly before the report was released. The dollar strengthened against the yen, trading at about 105.72 yen from about 105.35 yen early in the day.

U.S. Treasury debt prices were little changed on Wednesday as worries hedge funds offset the impact of trade data that hinted at stronger first-quarter economic growth. Benchmark 10-year notes were up 1/32 for a yield of 4.21 percent, unchanged from Tuesday.

The monthly trade gap was still the sixth-highest on record, despite the sharp decline.

"It's premature to say this is a turnaround in the trade deficit. There's a weak economy in Europe. There's a weak Japanese economy. They are still export-dependent" on the U.S. market for growth, said Stephen Gallagher, chief U.S. economist for SG Corporate and Investment Banking in New York.

The trade gaps with the European Union and Japan totaled $25.8 billion and $20.9 billion, respectively, during the first three months of 2005. Both are up from last year, despite a decline in the value of the dollar that has helped to make American exports more competitive in world trade.

Imports of clothing, textiles and related goods from China retreated 21.2 percent during March after a 9.8 percent increase in February. But imports of those products in the first three months of the year are 54 percent higher than last year, as the result of a surge in January when quota restrictions on textile imports expired.

Total imports from China declined 4.4 percent to $16.2 billion in March. That helped cut overall imports by 2.5 percent to $157.2 billion -- the largest monthly drop since December 2001, the same as the trade gap.

Although imports from other major trading partners such as Canada, Mexico and the European Union rose during March, the overall tally declined as China and smaller trading partners shipped fewer consumer goods, autos and auto parts, capital goods and industrial supplies to the United States.

"The trade deficit with China narrowed, but at nearly $13 billion, it is still ridiculously wide. After three months, China's surplus is $42 billion, a nearly 40 percent increase from last year. We are buying more from them but they are not increasing their purchases so the pressures on China to allow their currency to float will only intensify," said Joel Naroff, president of Naroff Economic Advisors.

March oil imports were the second highest on record and average prices for imported crude jumped $4.29 per barrel during the month -- the largest increase in nearly 15 years.

U.S. exports hit a record $102.2 billion. But the uptick, which included record exports to Canada and the European Union, could be short-lived because of signs of a slowdown in economic growth in the rest of the world, analysts said.

The March export numbers also "were flattered somewhat by what is likely to be a one-off 26.9 percent (month-to-month) rise in exports of civilian aircraft. This accounted for half of the increase in goods exports," said Julian Jessop, chief international economist with Capital Economics.

Imports are likely to rebound in coming months, so "the new record high for the trade deficit that had been expected in March may be just delayed a month or two," he added.

In a separate report, applications for U.S. home mortgages increased last week amid a robust uptick in purchasing and refinancing activity, an industry group said on Wednesday.

The Mortgage Bankers Association (search) said its seasonally adjusted index of mortgage application activity increased 9.4 percent to 781.0, adding to the 0.2 percent gain in the previous week.