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The government is expected to report on Friday that nonfarm payrolls grew 145,000, according to a Reuters survey, after adding 103,000 in December. But severe snow storms that slammed large parts of the nation could result in a much lower figure.

All of the anticipated job gains are expected to have been generated by the private sector and would add to other data suggesting that the manufacturing-driven recovery is now spreading to other sectors of the economy.

The Labor Department will release its closely watched employment report at 8:30 a.m. (1330 GMT)

"All the signals are pointing to a much improved labor market compared with last year and a strong payrolls report would be a nice confirmation that things are certainly headed in the right direction," said Omair Sharif, an economist at RBS in Stamford, Connecticut.

Still, the employment gains would be insufficient to prevent the jobless rate from edging up to 9.5 percent from 9.4 percent in November and too slim to discourage the Federal Reserve from completing its $600 billion government bond-buying program to support the economy.

The labor market has lagged the broader economy, which grew at a 3.2 percent annual rate in the fourth quarter. Fed Chairman Ben Bernanke on Thursday acknowledged the pick-up in the recovery, but said "it will be several years before the unemployment rate has returned to a more normal level."

WEATHER COULD DAMPEN PAYROLLS

Economists believe the weather could have restrained payroll growth by 15,000 to 70,000 positions in January, although the way in which the government conducts its count could temper any storm-related impact.

For severe weather to reduce the payroll count, employees have to be off work for the entire reference pay period and not paid for the time missed. Workers who receive any pay, even if just for one hour, during the pay period that includes January 12 would be counted as employed.

"My view is that the storms interrupted the hiring process. They have not diminished the demand for labor, but made it that much more difficult for both the job seekers and employers to consummate the hiring transaction," said Patrick O'Keefe, head of economic research at J.H. Cohn in Roseland, New Jersey.

The jobless rate dropped sharply in December, but that partly reflected discouraged workers leaving the labor force. Economists viewed the decline as overstated and expect it rose a touch in January.

Further increases could be in store in the months ahead as the labor market gains strength, which could spur some discouraged workers to come back into the labor force.

"We have a lot of workers on the sidelines. They will come back it when the labor market recovers," said Stephen Bronars, senior economist at Welch Consulting in Washington. "The effect is that the unemployment rate is going to stay above a level we would consider acceptable for a longer period of time."

A persistently high unemployment rate could put in jeopardy President Barack Obama's chances of winning a second-term in office in the 2012 election.

"Beyond a certain point ... the United States would be forced into a position of defaulting on its debt. And the implications of that on our financial system, our fiscal policy and our economy would be catastrophic," he told the National Press Club.

Bernanke coupled his warning with a call for the Obama administration and Congress to put in place a credible plan to curb future budget deficits.

He also offered a moderately more optimistic assessment of the economy's prospects than in other recent remarks, although he made clear the recovery still needs support from the Fed.

Some Republican leaders intend to use the need to raise the statutory debt ceiling as leverage for spending cuts. The Obama administration has said the nation would likely hit the limit between early April and late May.

If Congress does not raise the limit in a timely way, the government could be forced to scale back operations. A failure to lift the limit could raise the specter of a first-ever U.S. debt default and push interest rates up sharply.

Financial markets have not yet shown any nervousness over the debt limit, which has typically been raised after political grumbling, and Bernanke said the chances of a default were "very remote."

Still, his comments echoed dire warnings issued by Treasury Secretary Timothy Geithner and other Obama administration officials, who have also said failure to raise the debt ceiling could be "catastrophic."

The Fed chairman called on lawmakers not to hold the issue hostage to the contentious debate over how best to rein in record budget gaps.

"I would very much urge Congress not to focus on the debt limit as being the bargaining chip in this discussion, but rather to address directly the spending and tax issues that we have to deal with in order to make progress on this fiscal situation," Bernanke said.

FED MISSING BOTH MANDATE TARGETS

In discussing the recovery, Bernanke provided a modestly more rosy outlook than he has in other recent appearances, citing gains in household spending, improved consumer and business confidence and stepped-up bank lending as signs 2011 may bring stronger growth than 2010.

But he made clear Fed officials were not yet satisfied.

"Although economic growth will probably increase this year, we expect the unemployment rate to remain stubbornly above, and inflation to remain stubbornly below, the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our mandate," he said.

Bernanke's comments on the economy suggest the Fed believes it has plenty of time to let its policies boost growth and pull down a high unemployment rate before it needs to worry about tightening financial conditions to keep inflation in check.

The Morgan Stanley retail index .MVR rose 2.8 percent, driven by companies such as Sears Holdings Corp (SHLD.O), up almost 8 percent, and Ross Stores Inc (ROST.O), up 6 percent and at a new high.

U.S. chain-store sales climbed 4.8 percent in January. Along with rising service-sector activity and improved jobless claims figures, the stronger-than-expected retail figures added to growing evidence of an economic rebound.

"The strength in the retail sector is probably the standout feature today," said Nick Kalivas, an analyst at MF Global in Chicago. "You have generally a profit-taking, consolidative market after a couple of days of big run-ups (and) in front of the employment report tomorrow."

The wider market had come under pressure for most of the day as some investors said stocks were extended after weeks of gains, while a stronger dollar weighed on the natural resource sector.

Kalivas said the material and energy sectors were ripe for profit-taking while retail stocks had lagged the rally since the beginning of the year over concerns about the strength of consumer spending.

The Dow Jones industrial average .DJI gained 20.29 points, or 0.17 percent, to 12,062.26. The Standard & Poor's 500 Index .SPX rose 3.07 points, or 0.24 percent, to 1,307.10. The Nasdaq Composite Index .IXIC added 4.32 points, or 0.16 percent, to 2,753.88.

The S&P 500 has rallied more than 10 percent since breaking out of a trading range at the start of December and is up 21 percent since the end of August.

Data showed the U.S. services sector grew in January at its fastest pace since August 2005, and initial claims in the latest week for state unemployment benefits fell more than expected.

The S&P's energy sector .GSPE has been the top gainer this year, rallying 9.4 percent, while industrials .GSPI and technology .GSPT each have rallied 6 percent. Over that time the Morgan Stanley retail index has fallen 2.5 percent.

The strong performance in retail shares comes ahead of Friday's employment report that is expected to show the U.S. economy added 145,000 jobs in January.

Also in the retail sector BJ's Wholesale Club Inc (BJ.N) said it may put itself up for sale. Shares of BJ's, which is under pressure from a private equity firm that may make a hostile bid, jumped 12.2 percent to $48.25.

Clashes continued in Egypt, adding to concern that has pressured equities recently.

Merck & Co (MRK.N) fell 2.7 percent to $32.90 and was the top drag on the Dow after the drugmaker forecast 2011 earnings below Wall Street forecasts and withdrew its longer-term profit view.

Trading volume was 7.69 billion shares on the New York Stock Exchange, the American Stock Exchange and Nasdaq, down from last year's estimated daily average of 8.47 billion shares.

Advancing stocks outnumbered declining ones on the NYSE by almost 5 to 4. On the Nasdaq, decliners came in marginally ahead of be advancers.

(Editing by Kenneth Barry)

The Fed chairman provided a modestly more rosy outlook for the world's largest economy than he has done in recent appearances, citing gains in household spending, improved confidence, and stepped up bank lending as signs 2011 may bring stronger growth than 2010.

"Although economic growth will probably increase this year, we expect the unemployment rate to remain stubbornly above, and inflation to remain stubbornly below, the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our mandate," he said in an appearance at the National Press Club in Washington.

The event marks the second time Bernanke has spoken at the Press Club and taken questions from reporters afterwards. He said the central bank is considering holding more regular press conferences as part of improving its communications with the public.

His comments on the economy on Thursday suggest a Fed that believes it has plenty of time to let its policies boost growth and pull down a high unemployment rate before it needs to worry about tightening financial conditions to keep any inflation in check.

"We continue to see the Fed as making good on its intent to purchase $600 billion in long-term Treasury securities by the end of the second quarter," Barclays Capital economist Michael Gapen wrote in a note to clients. "We also believe that the chairman has the votes needed to pursue further asset purchases should he think conditions warrant."

The hard hit job market shows some grounds for optimism, but modest growth and cautious hiring suggest that it will be several years before the jobless rate returns to a more normal level, Bernanke said.

"Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established," he said.

Some analysts worry the Fed is underplaying gains in the recovery and is turning a blind eye to inflation pressures that may be building as evidenced by rising commodity prices around the world.

Economic data on Thursday pointed to stronger growth momentum, as the U.S. services sector grew at its fastest pace in more than five years, factory orders picked up and claims for jobless benefits fell off sharply.

"It seems to me that the chairman seems to be glass half-empty," said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut. "There are all these inflation concerns that are hitting the long-end of the bond market.

Bernanke played down worries that recent commodity price rises pose an inflation threat.

"Overall inflation remains quite low," he said.

U.S. Treasury bond prices extended losses after Bernanke's comments.

The Fed in November launched a new round of bond-buying, to be completed by mid-year, to support a recovery that appeared to be flagging. The U.S. central bank had already bought $1.7 trillion worth of longer-term assets to provide further stimulus for the economy after cutting benchmark short-term rates to near zero in December 2008.

The Morgan Stanley retail index .MVR rose 2.3 percent, driven higher by companies such as Sears Holdings Corp (SHLD.O) and Ross Stores Inc (ROST.O), which both rose over 6 percent.

U.S. chain store sales climbed 4.8 percent in January, according to the International Council of Shopping Centers. A sharp fall in claims for jobless benefits and a surging services sector were further signs of economic strength.

Nevertheless, the wider market came under pressure as some investors said stocks were extended after weeks of gains, while a stronger dollar weighed on the natural resource sector.

The Dow Jones Transportation Average .DJT and the Russell 2000 index, which have shown signs of topping out recently, were also facing resistance to further gains.

"The strength in the retail sector is probably the standout feature today and it might be causing repositioning out of the materials into the retail stocks," said Nick Kalivas, an analyst at MF Global in Chicago.

Kalivas said the material and energy sectors were ripe for profit taking while retail stocks had lagged the rally since the beginning of the year over concerns about the strength of consumer spending.

The Dow Jones industrial average .DJI dropped 2.68 points, or 0.02 percent, to 12,039.29. The Standard & Poor's 500 Index .SPX fell 0.55 point, or 0.04 percent, to 1,303.48. The Nasdaq Composite Index .IXIC lost 0.57 point, or 0.02 percent, to 2,748.99.

Data showed the U.S. services sector grew in January at its fastest pace since August 2005, and initial claims in the latest week for state unemployment benefits fell more than expected.

Also in the retail sector BJ's Wholesale Club Inc (BJ.N) said it may put itself up for sale, under pressure from a private equity firm that may make a hostile bid, and its shares jumped 13 percent to $48.58.

Concern that the unrest in Egypt could spread to the wider region and disrupt oil supplies have pressures equities recently.

Merck & Co (MRK.N) fell 2.8 percent to $32.87 and was the top drag on the Dow after the drugmaker forecast 2011 earnings below Wall Street forecasts and withdrew its longer-term profit view.

(Editing by Kenneth Barry)

The Fed chairman provided a modestly more rosy outlook for the world's largest economy than he has done in recent appearances, citing gains in household spending, improved confidence, and stepped up bank lending as signs 2011 may bring stronger growth than 2010.

"Although economic growth will probably increase this year, we expect the unemployment rate to remain stubbornly above, and inflation to remain stubbornly below, the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our mandate," he said in an appearance at the National Press Club in Washington.

The event marks the second time Bernanke has spoken at the Press Club and taken questions from reporters afterwards. He said the central bank is considering holding more regular press conferences as part of improving its communications with the public.

His comments on the economy on Thursday suggest a Fed that believes it has plenty of time to let its policies boost growth and pull down a high unemployment rate before it needs to worry about tightening financial conditions to keep any inflation in check.

"We continue to see the Fed as making good on its intent to purchase $600 billion in long-term Treasury securities by the end of the second quarter," Barclays Capital economist Michael Gapen wrote in a note to clients. "We also believe that the chairman has the votes needed to pursue further asset purchases should he think conditions warrant."

The hard hit job market shows some grounds for optimism, but modest growth and cautious hiring suggest that it will be several years before the jobless rate returns to a more normal level, Bernanke said.

"Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established," he said.

Some analysts worry the Fed is underplaying gains in the recovery and is turning a blind eye to inflation pressures that may be building as evidenced by rising commodity prices around the world.

Economic data on Thursday pointed to stronger growth momentum, as the U.S. services sector grew at its fastest pace in more than five years, factory orders picked up and claims for jobless benefits fell off sharply.

"It seems to me that the chairman seems to be glass half-empty," said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut. "There are all these inflation concerns that are hitting the long-end of the bond market.

Bernanke played down worries that recent commodity price rises pose an inflation threat.

"Overall inflation remains quite low," he said.

U.S. Treasury bond prices extended losses after Bernanke's comments.

The Fed in November launched a new round of bond-buying, to be completed by mid-year, to support a recovery that appeared to be flagging. The U.S. central bank had already bought $1.7 trillion worth of longer-term assets to provide further stimulus for the economy after cutting benchmark short-term rates to near zero in December 2008.

But major indexes were well off their lows by early afternoon, possibly showing their strength to carry the rally after a minor pullback. Data pointing to a recovery in the U.S. economy also supported stocks.

"We're encouraged by the read (in data) this month, which can signal an acceleration of our recovery. That should translate into market confidence, barring any headline risk, which could include Egypt and European sovereign debt," said Paul Radeke, vice president at the Minneapolis-based KDV Wealth Management.

But many sectors faced resistance after a sharp run-up, including the PHLX Semiconductor Index .SOX which struggled to stay above 450.

The Dow Jones Transportation Average .DJT and the Russell 2000 index, which have topped out recently, were also showing signs of resistance to further gains.

The Dow Jones industrial average .DJI was down 11.88 points, or 0.10 percent, at 12,030.09. The Standard & Poor's 500 Index .SPX was down 1.86 points, or 0.14 percent, at 1,302.17. The Nasdaq Composite Index .IXIC was down 1.43 points, or 0.05 percent, at 2,748.13.

Data showed the U.S. services sector grew in January at its fastest pace since August 2005, and initial claims in the latest week for state unemployment benefits fell more than expected.

In Egypt, at least six people were dead and 800 wounded after gunmen and stick-wielding supporters of President Hosni Mubarak attacked demonstrators camped out for a tenth day on Tahrir Square to demand the 82-year-old leader immediately end his 30-year rule.

Merck & Co (MRK.N) fell 2.6 percent to $32.94 and was the top drag on the Dow after the drugmaker forecast 2011 earnings below Wall Street forecasts and withdrew its longer-term profit view.

Major U.S. retailers shrugged off the snowiest January in six years to post sales that blew past analyst expectations, easing concerns that consumers were tapped out after the holidays.

Retailers posted a 4.2 percent increase in sales at stores open at least a year, beating analysts' expectations for a 2.7 percent gain, according to Thomson Reuters data. Gap Inc (GPS.N) shares were up 3.4 percent at $19.67.

The European Central Bank kept interest rates unchanged at 1 percent, as expected. ECB President Jean-Claude Trichet said that even with rising inflation, there is no threat to medium-term price stability.

(Editing by Kenneth Barry)

The Fed chairman provided a modestly more rosy outlook for the world's largest economy than he has done in previous speeches, citing gains in household spending, improved confidence, and stepped up bank lending as signs 2011 may bring stronger growth than 2010.

"Although economic growth will probably increase this year, we expect the unemployment rate to remain stubbornly above, and inflation to remain stubbornly below, the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our mandate," he said in remarks prepared for delivery to the National Press Club in Washington D.C.

Bernanke's comments suggest a Fed that believes it has plenty of time to let its policies boost growth and pull down a lofty unemployment rate before it needs to worry about tightening financial conditions to keep any price pressures in check.

Even the hard hit job market shows some grounds for optimism, Bernanke said.

However, modest growth and cautious hiring suggest that it will be several years before the jobless rate returns to a more normal level, he said.

"Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established," he said.

The Fed chairman defended the U.S. central bank's controversial $600 billion bond buying program, saying its benefits are evident from a range of financial market metrics.

These include higher stock prices and less volatility in equities markets and narrower spreads between riskier and less risky corporate bonds, he said.

U.S. Treasury bond prices extended losses after Bernanke's comments.

Bernanke played down worries that recent commodity price rises pose an inflation threat.

"Overall inflation remains quite low," he said.

Better-than-expected readings of U.S. economic growth was not enough to dislodge investor worries about rising unrest in Egypt, where gunmen fired on anti-government protesters in Cairo.

The fighting killed six and wounded more than 800 people, prompting new calls from Western powers for President Hosni Mubarak to start handing over power immediately.

Data showed the U.S. services sector grew in January at its fastest pace since August 2005, and initial claims in the latest week for state unemployment benefits fell more than expected.

The S&P 500 looked stretched from a valuation perspective. Among sectors, the PHLX Semiconductor Index .SOX was facing resistance above 450 after back-to-back closes higher than that level for the first time since November 2007.

The Dow Jones Transportation Average .DJT and the Russell 3000 index, which have topped out recently, were also showing signs of resistance to further gains.

"It's a little premature to say that we are headed for a correction, but we were certainly due for some consolidation after this rally," said Brian Lazorishak, portfolio manager at Chase Investment Counsel of Charlottesville, Virginia.

The Dow Jones industrial average .DJI was down 26.67 points, or 0.22 percent, at 12,015.30. The Standard & Poor's 500 Index .SPX was down 5.30 points, or 0.41 percent, at 1,298.73. The Nasdaq Composite Index .IXIC was down 12.34 points, or 0.45 percent, at 2,737.22.

Merck & Co (MRK.N) fell 2.4 percent to $33.02 and was the top drag on the Dow after the drugmaker forecast 2011 earnings below Wall Street forecasts and withdrew its longer-term profit view.

Major U.S. retailers shrugged off the snowiest January in six years to post sales that blew past analyst expectations, easing concerns that consumers were tapped out after the holidays.

Retailers posted a 4.2 percent increase in sales at stores open at least a year, beating analysts' expectations for a 2.7 percent gain, according to Thomson Reuters data. Gap Inc (GPS.N) shares were up 4.9 percent at $19.97.

(Editing by Padraic Cassidy)

While reports on Thursday continued to paint a bullish picture for the economy, they also showed some inflation pressures under control, in stark contrast to developments in other parts of the world. U.S. companies continue to hold the line on costs, despite a spike in commodity prices.

The Institute for Supply Management's index of national non-manufacturing activity rose to 59.4 last month -- above economists' expectations for dip to 57.0 -- from 57.1 in December.

A reading below 50 indicates contraction in the sector, and it was the 14th straight month of expansion in the nation's vast services sector.

"The economic data continue to overshoot expectations. We are seeing an acceleration in economic activity that is less reliant on public support and more self-sustaining," said Scott Anderson a senior economist at Wells Fargo Securities in , Minneapolis.

The economy grew at a 3.2 percent annual rate in the fourth quarter, accelerating from a 2.6 percent pace in the prior period, and economists believe strengthening domestic demand will translate into increased hiring of new workers.

A report from the Labor Department showed initial claims for state unemployment benefits tumbled 42,000 to a seasonally adjusted 415,000, unwinding most of the previous week's weather-induced spike.

Economists had forecast claims dropping to 420,000.

The claims data falls outside the survey period for the government's closely watched employment report for January, scheduled for release on Friday.

The economy probably created 145,000 jobs, according to a Reuters poll, after adding 103,000 in December. Reports on Wednesday suggested private hiring was gathering pace.

JOBS OUTLOOK IMPROVING

Expectations for a rise a pick-up in jobs growth last month were also bolstered by a jump in the ISM's employment gauge to the highest level since May 2006.

The data had little impact on U.S. financial markets as stock market investors worried about increasing chaos in Egypt. U.S. stocks fell and prices for government debt also traded lower. The dollar rose against a basket of currencies.

Though the downward trend in initial claims has been slowed by extreme weather in large parts of the country, economists believe they will soon drop below 400,000, a level believed to signal strong job growth.

"We think the trend in claims is coming down because small firms are firing fewer people. With credit now easing we are hopeful claims will fall significantly further over the next few months," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

Initial claims for state unemployment benefits tumbled 42,000 to a seasonally adjusted 415,000, the Labor Department said. The lower-than-forecast claims number added to evidence that Friday's key U.S. non-farm payrolls report would show a jump in employment in January.

But better-than-expected readings of economic growth might not be enough to dislodge investor worries about rising unrest in Egypt, where gunmen fired on anti-government protesters in Cairo. The fighting killed six and wounded more than 800 people, prompting new calls from Western powers for President Hosni Mubarak to start handing over power immediately.

"Egypt is slowing coming back to the front burner. People thought it could be resolved peacefully and quickly, but that doesn't seem to be the case. That's troubling from an equity perspective, since the country is important, especially for oil prices," said Nicholas Colas, chief market strategist at The Convergex Group in New York.

Brent crude rose above $103 a barrel on Thursday after the violent clashes in Egypt raised concern of supply disruptions and unrest across the Middle East.

The Dow Jones industrial average .DJI was down 13.09 points, or 0.11 percent, at 12,028.88. The Standard & Poor's 500 Index .SPX was down 1.42 points, or 0.11 percent, at 1,302.61. The Nasdaq Composite Index .IXIC was down 0.75 points, or 0.03 percent, at 2,748.81.

Merck & Co (MRK.N) fell 3.5 percent to $32.63 and was the top drag on the Dow after the drugmaker forecast 2011 earnings below Wall Street forecasts and withdrew its longer-term profit view.

(Additional reporting by Ryan Vlastelica; Editing by Padraic Cassidy)

Initial claims for state unemployment benefits tumbled 42,000 to a seasonally adjusted 415,000, the Labor Department said on Thursday, unwinding most of the previous week's weather-induced spike.

Economists forecast claims dropping to 420,000.

The claims data falls outside the survey period for the government's closely watched employment report for January, scheduled for Friday. The economy probably created 145,000 jobs, according to a Reuters poll, after adding 103,000 in December.

"This is showing the labor market is recovering but not at a pace that will keep the Federal Reserve from its accommodative stand," said Rudy Narvas, a senior economist at Societe Generale in New York.

In a second report, the department said productivity, a measure of hourly output per worker, increased at an annual rate of 2.6 percent, after rising at an upwardly revised 2.4 percent growth pace.

The increase, which was well above economists' expectations for a 2 percent growth rate, bodes well for company profits.

U.S. stock index futures slightly trimmed losses after the data, while U.S. bond prices briefly extended losses.

The continued growth in productivity indicated companies were extracting more output from workers, which could delay hiring.

"This suggest companies can still squeeze out more productivity rather than hire more workers," said Narvas.

While the recovery is strengthening and broadening out, labor market healing has been unusually slow.

The economy grew at a 3.2 percent annual rate in the fourth quarter, accelerating from a 2.6 percent pace in the prior period, and economists believe strengthening domestic demand will translate into increased hiring of new workers and the lengthening of hours for existing employees.

The productivity report showed hours worked in the fourth quarter increased at a 1.8 percent rate after a 1.4 percent increase in the July-September quarter.

Unit labor costs, a gauge of potential inflation pressures closely watched by the Federal Reserve, fell at a 0.6 percent rate after dipping at a 0.1 percent pace in the third quarter.

Economists had expected unit labor costs to rise at a 0.3 percent rate in the fourth quarter. For the whole of 2010, unit labor costs dropped 1.5 percent after declining 1.6 percent in 2009.

Total nonfarm output grew at a 4.5 percent rate in the last three months of 2010, the Labor Department said, after rising at a revised 3.8 percent rate in the third quarter.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)

Initial claims for state unemployment benefits tumbled 42,000 to a seasonally adjusted 415,000, the Labor Department said, unwinding most of the previous week's weather-induced spike.

Economists polled by Reuters had forecast claims dropping to 420,000. The prior week's figure was revised up to 457,000, from the previously reported 454,000.

The claims data falls outside the survey period for the government's closely watched employment report for January, scheduled for Friday. The economy probably created 145,000 jobs after adding 103,000 in December, according to a Reuters poll.

The prior week's claims were distorted by extreme winter weather in large parts of the country and a Labor Department official said the four states that had reported a weather-related jump accounted for the bulk of last week's decline in filings.

The four-week moving average of unemployment claims -- a better measure of underlying trends - rose 1,000 to 430,500 last week.

The number of people still receiving benefits under regular state programs after an initial week of aid dropped 84,000 to 3.93 million in the week ended January 22 from an upwardly revised 4.0 million the prior week.

Economists had expected so-called continuing claims to fall to 3.92 million from a previously reported 3.99 million.

* Investors are likely to await a slew of economic data due later in the session for further direction, including factory orders and the Institute of Management Supply's (ISM) non manufacturing index, both due at 10 a.m. ET.

* Factory orders are expected to have declined by 0.5 percent in December after rising 0.7 percent in November.

* Weekly jobless claims at 8:30 a.m. ET will likely be of interest as the data comes ahead of Friday's crucial non-farm payrolls.

* Further corporate results are likely to generate some interest, with the likes of Mastercard (MA.N), Merck (MRK.N) and Viacom (VIA.N) due to release earnings.

* U.S. stocks stalled on Wednesday as technical measures suggested a five-month rally was losing momentum.

* The S&P 500 .SPX started to look overbought again after reaching 2 1/2-year highs on Tuesday. A key measure of the rally's strength suggests stocks are vulnerable to a correction, analysts said.

* Traders will closely monitor political unrest in Egypt after supporters of President Hosni Mubarak opened fire on protesters in Cairo on Thursday, killing five.

* Brent crude prices were above $103 as investors worried about the prospect of further unrest across the Middle East.

* In company news, Teva Pharmaceutical Industries (TEVA.O) has been notified in a warning letter of weaknesses at its Jerusalem oral solid dosage plant (OSD) after an inspection last year by the U.S. Food and Drug Administration.

* Bank of America Corp (BAC.N) is close to a deal to sell its Balboa insurance business to Australia's QBE Insurance Group Ltd (QBE.AX), Bloomberg reported, citing unnamed sources.

* Visa Inc's (V.N) fell 1 percent in after-hours trade after the firm said quarterly profit rose 16 percent, slightly beating expectations, as consumer spending ramped up and the company processed more transactions abroad.

* On the economic front, a top Federal Reserve official said on Wednesday she did not think the U.S. central bank would have to extend its $600 billion bond-buying program beyond midyear, but economic weakness could force the Fed's hand.

* In Europe, the pan-European FTSEurofirst 300 .FTEU3 index of top shares slipped in early trade, with heavyweight oil major Royal Dutch Shell RDsa.L down after its quarterly net profits fell short of expectations.

(Reporting by Harpreet Bhal; Editing by Will Waterman)

Strength in markets such as California and strong demand for food helped Costco post a better-than-expected 9 percent rise in same-store sales.

Limited Brands, which has won praise from analysts for its efforts to become a destination for small gifts, reported a 24 percent rise in same-store sales, well past the analysts' average estimate of 6.7 percent.

Of the 11 retailers that have reported sales so far, six beat estimates, according to Thomson Reuters I/B/E/S.

Other retailers might not been so lucky as the snowiest January in six years played havoc with hopes of a strong ending to the holiday season. The weather curbed shopper traffic in malls and stores, especially in the Northeast, where there were multiple snowstorms.

"Amidst a sea of uncertainty in retail today, we believe Costco remains a team that can (play) both offense and defense in any environment," JPMorgan analyst Charles Grom said on Thursday. Excluding the weather impact, he said, Costco's same-store sales stands as its best single monthly report in 5 years.

Fewer discounted goods in a typically promotional month could also have kept bargain-hungry shoppers away, analysts said.

Retailers ranging from Target Corp to Saks Inc are also expected to report January sales on Thursday. January is the final month and the smallest contributor to sales in the retail sector's fourth quarter.

Analysts expect sales at stores open at least a year, or same-store sales, to show a rise of 2.7 percent, compared with a year-earlier increase of 3.3 percent, according to Thomson Reuters data.

* Investors are likely to await a slew of economic data due later in the session for further direction, including factory orders and the Institute of Management Supply's (ISM) non manufacturing index, both due at 10 a.m. ET.

* Factory orders are expected to have declined by 0.5 percent in December after rising 0.7 percent in November.

* Weekly jobless claims at 8:30 a.m. ET will likely be of interest as the data comes ahead of Friday's crucial non-farm payrolls.

* Further corporate results are likely to generate some interest, with the likes of Mastercard (MA.N), Merck (MRK.N) and Viacom (VIA.N) due to release earnings.

* U.S. stocks stalled on Wednesday as technical measures suggested a five-month rally was losing momentum.

* The S&P 500 .SPX started to look overbought again after reaching 2 1/2-year highs on Tuesday. A key measure of the rally's strength suggests stocks are vulnerable to a correction, analysts said.

* Traders will closely monitor political unrest in Egypt after supporters of President Hosni Mubarak opened fire on protesters in Cairo on Thursday, killing five.

* Brent crude prices were above $103 as investors worried about the prospect of further unrest across the Middle East.

* In company news, Teva Pharmaceutical Industries (TEVA.O) has been notified in a warning letter of weaknesses at its Jerusalem oral solid dosage plant (OSD) after an inspection last year by the U.S. Food and Drug Administration.

* Bank of America Corp (BAC.N) is close to a deal to sell its Balboa insurance business to Australia's QBE Insurance Group Ltd (QBE.AX), Bloomberg reported, citing unnamed sources.

* Visa Inc's (V.N) fell 1 percent in after-hours trade after the firm said quarterly profit rose 16 percent, slightly beating expectations, as consumer spending ramped up and the company processed more transactions abroad.

* On the economic front, a top Federal Reserve official said on Wednesday she did not think the U.S. central bank would have to extend its $600 billion bond-buying program beyond midyear, but economic weakness could force the Fed's hand.

* In Europe, the pan-European FTSEurofirst 300 .FTEU3 index of top shares slipped in early trade, with heavyweight oil major Royal Dutch Shell RDsa.L down after its quarterly net profits fell short of expectations.

(Reporting by Harpreet Bhal; Editing by Will Waterman)

The snowiest January in six years played havoc with hopes of a strong ending to the holiday season, weighing down shopper traffic in malls and stores, especially in the Northeast, which saw multiple snowstorms.

Fewer discounted goods in a typically promotional month could also have kept bargain-hungry shoppers away, analysts pointed out.

Retailers ranging from Target Corp to Saks Inc report January sales on Thursday. January is the final month and the smallest contributor to sales in the retail sector's fourth quarter.

Sales at stores open at least a year, or same-store sales, are forecast to rise 2.7 percent, compared with a rise of 3.3 percent a year earlier, according to Thomson Reuters data.

"The market is obviously very aware of Mother Nature's negative impact this month, as well as limited clearance levels. As a result, we would not read too much into any January softness," Retail Metrics President Ken Perkins said.

Like others, Perkins sees February as a better indicator of how retailers are faring.

In an early batch of results on Wednesday, mall-based teen apparel chain Hot Topic Inc reported a 3.3 percent fall in January same-store sales, while analysts expected only a 2.8 percent decline. On the other hand, Zumiez beat estimates with a 15.3 percent rise in same-store sales.

U.S. shoppers cut back on shopping in January after opening their wallets during November and December, helping U.S. retailers post their best holiday sales in six years.

Claudia Carrmoma was one of them. After scooping up discounts on clothes in December, she hardly shopped in January. The 38-year old New Jersey resident, who works at a jewelry store in Manhattan, said her spring shopping "depends on the money I make."

"I feel like I should save now," Carrmoma said.

Analysts expect teen chains American Eagle Outfitters Inc, Abercrombie & Fitch Co and Aeropostale Inc -- all three of which face tough comparisons versus last year -- as well as apparel chains such as Gap Inc to report same-store sales declines in January.

Luxury chains, Victoria's Secret parent Limited Brands Inc and warehouse club operator Costco Wholesale Corp are among those expected to do well.

"Despite the headwinds that existed during this month, we believe that recent solid trends at the high end likely continued through January as well, as luxury sales continued to outpace the middle and lower end," Barclays analyst Robert Drbul said.

He sees same-store sales rises for both Nordstrom Inc and Saks Inc.

(Reporting by Dhanya Skariachan; editing by Andre Grenon)

North Sea Brent crude futures rose nearly a dollar to $103.27 per barrel, the highest in 28 months, after supporters of Egyptian President Hosni Mubarak opened fire on protesters, in what many saw as an official crackdown on anti-government demonstrations.

Fears that unrest in Egypt and Tunisia will spread to other countries in the Middle East and threaten the region's oil exports overshadowed the bearish effect of soaring gasoline inventories in the United States, prompting investors to move to safer assets, or the sidelines.

In currency markets, the euro paused below a 12-week peak, though tough talk on the inflation from the European Central Bank after its monthly meeting later in the day could give it fresh impetus to test resistance around $1.3950.

Higher energy prices along with copper, sugar and cocoa prices at or near record highs have put a sharp dent in appetite for riskier assets such as emerging market equities as investors fear price pressures will get out of control.

In fast growing countries such as Brazil, India and China, worries have grown that policymakers will need to tighten monetary policy aggressively to tame rising consumer prices, which could put a dampener on a key driver of the global economy.

"The current strong pace of activity is clearly not compatible with comfortable and stable levels of inflation, underscoring the urgency of continued monetary policy tightening," said Leif Eskesen, chief economist for India & ASEAN at HSBC, in a report on India's services sector.

The report showed business activity in the country's services sector grew at a faster pace in January than the month before, but the input price index hit a 30-month high.

Higher prices for raw materials are already squeezing corporate profit margins. While many firms appear able to pass those costs on for now, sharp spikes will eventually force consumers to cut back on spending.

U.S. candy maker Hershey Co (HSY.N) reported overnight that it was seeing "meaningfully higher" costs for ingredients such as cocoa and sugar, while Australia's Qantas (QAN.AX) announced a round of fuel surcharges on Thursday.

Japan's Nikkei .N225 fell 0.3 percent, easing slightly after posting its biggest jump in two months the day, as investors took a more cautious stance and awaited key earnings results and Friday's U.S. payrolls data.

Shares of Panasonic Corp (6752.T) fell 3.2 percent after it posted a worse-than-expected drop in quarterly profit as tough price competition and a stronger yen offset help from Japan's incentive scheme for eco-friendly appliances.

Overall, foreigners remained net buyers of Japanese stocks for a 13th straight week on optimism that the U.S. and global economies are gathering momentum.

Developed market shares are likely to outperform those in emerging markets over the next six months, until it is clear inflation is under control, said Shane Oliver, chief investment strategist at AMP Capital Investors.

U.S. private employers added more jobs than expected in January, the 12th consecutive month that companies took on staff, adding to hopes that the American labor market is slowly recovering and bolstering hopes for the more comprehensive U.S. jobs report on Friday.