The data on Thursday was the latest to indicate the economy's resilience in the face of higher taxes, although a separate report showing the US trade gap widened in January dimmed the near-term outlook a bit.

"Fundamentally, we are getting on a little better footing right now," said Omair Sharif, an economist at RBS in Stamford, Connecticut.

Initial claims for state jobless aid fell 7,000 to a seasonally adjusted 340,000, the Labor Department said. It was the second straight weekly drop, and it confounded economists' expectations for a rise to 355,000.

The four-week moving average for new claims, a better measure of labor market trends, fell 7,000 to 348,750 - the lowest level since March 2008.

A 2 percent payroll tax cut ended and tax rates went up for wealthy Americans on Jan. 1. In addition, $85 billion in federal budget cuts that could slice as much as 0.6 percentage point from growth this year started on March 1.

Against the backdrop of tighter fiscal policy, economists were encouraged by the drop in claims.

"It suggests that some jobs are being created and there is income that is falling into the consumers' pockets," said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

In another sign of improving economic conditions, household debt grew at its fastest pace since early 2008 in the fourth quarter of last year, the Federal Reserve said in a report.

Other reports showed steady job gains and a pick-up in tax refunds helped to boost sales at several retailers in February.

The new reports added to recent data on housing and factory activity that have pointed to an acceleration in growth.

"As we start the year, first-quarter growth is going to be substantially stronger than where we ended last year," said Bullard.

The economy grew at a 0.1 percent annual rate in the fourth quarter. Growth estimates for the first three months of this year range as high as 2.8 percent, mostly reflecting a pick-up in the pace at which businesses are restocking.

In a separate report, the Commerce Department said the trade deficit widened to $44.45 billion in January from $38.14 billion in December. Exports fell, giving back the bulk of December's gains, while imports rebounded after being held down by disruptions to port activity in the prior months.

The inflation-adjusted trade deficit widened to $48.0 billion from $44.2 billion in December. Economists said this implied trade would be a small drag on first-quarter growth.

"The sharp deterioration in trade shaves a bit from the outlook for growth in the first quarter," said Diane Swonk, chief economist at Mesirow Financial in Chicago. "There are signs that domestic demand is firming, which would provide a major offset to weakness abroad."

Stocks on Wall Street were trading slightly higher on the claims data, while prices for US Treasury debt fell. The dollar weakened against a basket of currencies.

LAYOFFS HAVE EBBED

While the claims data fell outside the survey period for the government's report on February employment due on Friday, economists said they would not be surprised if job growth during the month beat expectations. A report on Wednesday had shown private employers hired more workers than expected last month.

According to a Reuters survey of economists, employers probably added 160,000 jobs last month, a small pick-up up from January's 157,000 count. That would just be enough to hold the jobless rate steady at 7.9 percent.

Economists say job gains of at least 250,000 per month are needed over a sustained period to significantly dent the ranks of the unemployed. Job growth averaged 200,000 in the three months through January.

High unemployment prompted the Federal Reserve last year to launch an open-ended bond buying program to keep borrowing costs low. The US central bank said it would keep up the program until there was a substantial improvement in the outlook for the labor market.

In testimony to Congress last week, Fed Chairman Ben Bernanke signaled the central bank would press forward with plans to buy $85 billion in bonds per month.

Another report showed planned layoffs at US companies rose for the second month in a row in February as the financial sector cut the most employees in over a year. Still, planned layoffs remain at historic low levels.

"The rise in financial industry job cut announcements appears to have been driven by planned layoffs in the mortgage business at one large bank," said John Ryding, chief economist at RDQ Economics in New York.