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The data on Thursday offered hope for a pick-up in economic activity in the third quarter.

"It's encouraging to see that jobless claims are trending lower now. And also it looks like the U.S. economy entered the third quarter with a little bit more momentum than previously expected," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

Initial claims for state unemployment benefits fell 16,000 last week to 453,000, the Labor Department said, exceeding market expectations for a decline to 460,000.

Separately, gross domestic product growth -- which measures total goods and services output within U.S. borders -- was revised up to an annualized rate of 1.7 percent from 1.6 percent, the Commerce Department said in its final estimate.

That compared to financial markets' expectations for a 1.6 percent pace and represented a sharp slowdown from the first quarter's 3.7 percent growth rate.

U.S. stock index futures turned positive on the data, while Treasury debt prices pared gains. The U.S. dollar cut losses against major currencies.

Although the economy has now grown for four straight quarters, the recovery from the longest and deepest downturn since the Great Depression has lacked strength to chip away at a 9.6 percent unemployment rate.

The Federal Reserve last week signaled it was ready to inject more money into the economy to shore up the recovery and avert a damaging downward spiral in prices.

Growth in the second quarter was supported by consumer spending, which was revised up to a 2.2 percent growth rate, the largest increase in three years, from the previously reported 2.0 percent rise.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 1.9 percent rate in the January-March period.

Business inventories increased $68.8 billion rather than the $63.2 billion reported last month. The change in inventories contributed 0.82 percentage points to second-quarter GDP.

Excluding inventories, the economy expanded at a 0.9 percent pace instead of the 1.0 percent rate reported last month.

But a 33.5 percent jump in imports, which was previously reported as a 32.4 percent increase, kept growth on a weak trajectory. Analysts believe the surge in imports was likely the result of Chinese exporters rushing to push through goods before the expiration of value added tax rebates.

The growth in imports, which was the strongest in 26 years and eclipsed a 9.1 percent rise in exports, created a trade deficit that chopped 3.5 percentage points from GDP.

Analysts do not expect the robust import growth pace to continue, which means trade will be less of a drag on growth in the third quarter.

The plan calls for AIG to repay and end a Federal Reserve Bank of New York credit facility, and convert into common stock the $49.1 billion of AIG preferred shares held by the Treasury Department. The steps are to be completed before the end of the first quarter of next year.

The deal, reached after AIG's board met with the government on Wednesday, shows the insurer is making significant progress in disentangling itself from the government after a $182.3 billion bailout.

The repayment plan comes at a crucial time for the government. The Troubled Asset Relief Program, set up amid the 2008 financial crisis to shore up the financial industry, expires on Sunday, and the nation goes to the polls for mid-term elections in November.

Under the plan, the Treasury will get about 1.66 billion common shares for its preferred shares, raising its stake in the insurer to 92.1 percent. The Treasury will sell its stake in AIG on the open market over time.

AIG will also issue up to 75 million warrants with a strike price of $45 per share to its existing common shareholders.

The exchange of the Treasury's preferred stock will not be executed until the Fed credit facility is repaid in full.

AIG owes about $20 billion under the facility. It expects the money to come from the initial public offering of its American International Assurance (AIA) unit and the sale of American Life Insurance Co (Alico) to MetLife Inc, and other assets.

The Fed also owns preferred interest worth about $26 billion in AIA and Alico. Under the plan, AIG would effectively transfer a part of that interest to the Treasury, and pay that down through future asset dispositions.

AIG shares were up 1.9 percent to $38.15 in premarket trading on Thursday.

(Reporting by Paritosh Bansal; Editing by Derek Caney and John Wallace)

The banks are eager to repay the taxpayer money, but the meek economic recovery has gotten in the way.

Analysts and attorneys that work with banks on capital issues said the institutions are feeling pressure to replace the government aid, facing the prospect of skyrocketing dividend payments on funds from the Troubled Asset Relief Program, or TARP.

This pressure is likely to compel small and regional banks to raise capital or sell themselves to rivals in the coming years, according to analysts.

"Pay days for a lot of banks got pushed out," said Jeff Davis, bank analyst with Guggenheim Securities. "We all expected much of this to be repaid by 2011, but the economy's not growing like we all thought."

Bigger banks have recovered more quickly from the 2007-2009 financial crisis and have been able to get out from under TARP while many small banks continue to struggle with their exposure to the residential and commercial real estate markets.

Smaller institutions also have fewer ways to drag in profits than their larger competitors.

"They don't participate in the kinds of activities where the big banks have made big profits," said Simon Johnson, a professor at the MIT Sloan School of Management. "A lot of it is around trading, including in derivatives and the big banks have huge market share in that now."

DIVIDENDS TO PRESSURE REPAYMENTS

In October 2008, the Treasury Department created as part of TARP the Capital Purchase Program to dole out funding to banks large and small to shore up their balance sheets and prod them into lending.

It has disbursed $205 billion to 707 institutions in chunks as large as $25 billion and as small as $301,000. As of August 2010, $140 billion had been repaid with 80 institutions giving back all they received, according to the Treasury.

The largest banks, like Bank of America Corp and Goldman Sachs, have repaid the billions they received. It has been harder, however, for smaller institutions like Regions Financial Corp and SunTrust Banks Inc.

The two U.S. Southeastern banks combined have $8.5 billion in TARP investments that have yet to be repaid. Executives for both banks have said they wish to repay the money as soon as possible, and are working with regulators.

A delay for any bank will have consequences.

The dividend payments for TARP banks rise from 5 percent to 9 percent on the 5-year anniversary of their receipt of the initial preferred stock investment. Many banks, and regulators, are hoping to avoid that.