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Initial claims for state unemployment benefits dropped 24,000 to a seasonally adjusted 398,000, the Labor Department said on Thursday.

Economists had forecast claims falling to 415,000.

The labor market took a beating in May and June, with the increase in nonfarm payrolls totaling only 43,000.

The drop in jobless claims last week below the 400,000 mark that is normally associated with a stable labor market will be welcome news for the economy after a recent string of weak data.

U.S. stock index futures rose on the report, while prices for Treasury debt pared gains.

"We've been surprised on the upside the past several weeks, but this drop does signal that in the most recent couple of weeks, employers are not laying off large numbers of individuals," said Patrick O'Keefe, director of economic research at J.H. Cohn in New York.

"What we're seeing is that the claims levels are returning to their more normal level, which is in a positive direction."

But an uncertain economic outlook, which has been further clouded by deadlocked talks to raise the nation's borrowing limit and avoid a damaging debt default and credit rating downgrade could hamper progress in the labor market.

The government is expected to report on Friday that the economy grew at a 1.8 percent annual rate, according to a Reuters survey, after a tepid 1.9 percent pace in the first three months of the year.

On Wednesday, the Federal Reserve said growth slowed in much of the country in June and early July.

A Labor Department official said there were no special factors in last week's jobless claims data.

The four-week moving average of claims, considered a better measure of labor market trends, fell 8,500 to 413,750.

The number of people still receiving benefits under regular state programs after an initial week of aid declined 17,000 to 3.70 million in the week ended July 16.

Data for the so-called continuing claims covered the survey week for the household survey from which the unemployment rate is derived. The jobless rate rose to 9.2 percent in June from 9.1 percent in May.

The number of Americans on emergency unemployment benefits rose 18,427 to 3.17 million in the week ended July 9, the latest week for which data is available.

A total of 7.65 million people were claiming unemployment benefits during that period under all programs, up 320,152 from the prior week.

(Reporting by Lucia Mutikani, Editing by Andrea Ricci)

* The S&P 500 .SPX fell 2 percent on Wednesday, losing nearly 3 percent for the week, hit by weak earnings and lackluster economic data and as U.S. politicians struggle to come to an agreement over the debt ceiling days before the deadline to avoid default.

* A bill to cut the U.S. deficit faced a nail-bitingly close vote in Congress on Thursday as the top Republican lawmaker sought to quell an internal revolt and push his plan to avoid a ruinous default.

* Approval of a plan by U.S. House of Representatives Speaker John Boehner would break the inertia in Washington over a U.S. debt crisis that has spooked markets and raised the prospect that the government of the world's largest economy will run out of money to pay its bills in less than a week.

* Investors were also closely watching jobless claims data due at 8:30 a.m. If the number for the week ending July 23 is near Wall Street's forecast of 415,000, it will mark the 16th consecutive week that initial jobless claims hover above 400,000.

* U.S. pending home sales probably fell about 2 percent in June after two months of unusual volatility, which included an 11.3 percent drop in April followed by an 8.2 percent rebound in May. The data is due at 10:00 a.m.

* S&P 500 futures rose 1.8 points and were slightly above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures were up 12 points, and Nasdaq 100 futures gained 5.75 points.

* Exxon Mobil Corp (XOM.N), the world's largest publicly traded oil company, is among several companies to report results. High crude oil prices are expected to have boosted second-quarter profits, but investors have been pressing the company to deliver more cash to shareholders through a higher dividend.

* Others due to report include Starbucks Corp (SBUX.O).

* Financial stocks were in focus as major European banks announced jobs cuts. Swiss bank Credit Suisse (CSGN.VX) is cutting about 2,000 jobs after a second quarter hit by weak trading activity and the strong Swiss franc.

* HSBC (HSBA.L) may cut more than 10,000 jobs as it embarks on a cost-cutting drive, Sky News reported, citing people close to Europe's biggest bank.

* Ford Motor Co (F.N) plans to build a $900 million production plant in India, doubling its investment in the country, as the No. 2 U.S. carmaker seeks to catch up with rivals in the second-fastest growing auto market in the world.

(Editing by Padraic Cassidy)

The second quarter results released on Thursday come on the heels of a management shakeout that resulted in the departure of Markets divisions chief Devin Wenig and several other high-level executives.

Thomson Reuters Chief Executive Thomas Glocer is now taking direct responsibility for the division's turnaround.

Adjusted revenue in the Markets division, which competes with Bloomberg LP, News Corp's Dow Jones and FactSet Research, rose 1 percent from a year earlier to $1.9 billion, slowing from the 2 percent gain in the first quarter.

Overall company results were within the estimated range Thomson Reuters announced last week.

Revenue excluding divestitures was $3.20 billion, up 4 percent before currency adjustments, mainly due to a strong performance in the Professional division serving legal, accounting and other professionals.

Adjusted earnings per share rose to 51 cents from 41 cents in the same quarter last year. Analysts had expected earnings of 49 cents per share and revenue of $3.16 billion, according to Thomson Reuters I/B/E/S.

Thomson Reuters reaffirmed its outlook, saying it expected revenue to grow in the mid-single digits in 2011.

Net profit fell to 768 million Swiss francs ($958.9 million), the bank said on Thursday, below average analyst forecasts for 1 billion. Net new assets in private banking were 11.5 billion, below average analyst forecasts for 14.2 billion.

Switzerland's second biggest bank said it planned to cut about 4 percent of its staff of 50,700, about the same number it added in a post-crisis hiring spree focused on fixed income, the area hit most by current sluggish markets.

"We have to recognize the likelihood that the current headwinds in the economic and market environment may be more persistent than we would have hoped," said Chief Executive Brady Dougan and Chairman Urs Rohner.

"We expect interest rates to remain low for an extended period of time and the strong Swiss franc to continue to have an impact on our results. We may also continue to see lower levels of client activity and a volatile trading environment."

Investment banks worldwide have been hit by slow trading due to the debt crises in the euro zone and United States as well as post-crisis regulations aimed at forcing banks to hold more capital to protect them from future shocks.

Rival UBS said on Tuesday it would cut costs by up to 2 billion francs and push back targets after reporting disappointing second-quarter profits due to slow trading in fixed income, currencies and commodities (FICC).

Credit Suisse shares, which had already slipped after the UBS results, fell 2.8 percent at 0709 GMT, compared to a 0.9 percent weaker European banking sector.

"Q2 results are far below market expectations. The main reason for the very disappointing Q2 result was the investment bank," said DZ Bank analyst Matthias Duerr.

COST CUTS TO TARGET INVESTMENT BANK

Credit Suisse Chief Financial Officer David Mathers told a conference call for journalists that the cost cuts would hit all divisions but particularly the investment bank, and all geographies, with 500 of the job cuts to come in Switzerland.

The job cuts are part of a cost savings program aimed at reducing 1 billion Swiss francs in the expense run-rate during 2012. Implementation costs in 2011 would be 400 to 450 million francs, of which 142 million were taken in the second quarter due to jobs already cut in investment banking.

Credit Suisse said it would cut most of the jobs in low-return areas and continue to invest in growth businesses, including serving the ultra wealthy, emerging markets and rates and foreign exchange flow sales.

UBS and Credit Suisse face the added burden of high cost bases in Switzerland as the safe-haven franc soars.

Credit Suisse said pretax profit in investment banking dropped 71 percent to 231 million, with fixed income sales and trading results significantly lower due to challenging market-making conditions and moderately weaker client flows.

"Volatility in FICC revenues (are) also likely to raise concerns," said Cormac Leech of Canaccord Genuity, adding that the earnings miss was worse than that for UBS and he expected downgrades to 2012 earnings forecasts of 5-7 percent.

The bank said it was conducting an internal investigation after it said earlier this month it was being targeted by a U.S. investigation following the indictment of several of its bankers for helping Americans dodge taxes.

"This is a very serious issue and we're working hard to try to get a resolution," CEO Dougan told Reuters Insider.

CFO Mathers said the appointment of Hans-Ulrich Meister as new chief executive of private banking in addition to his role as CEO Credit Suisse Switzerland had nothing to do with the probe but was part of succession plans.

He noted that Walter Berchtold, who moves to become chairman of private banking, remained a member of the executive board.

(Editing by David Holmes and Andrew Callus)

European stock futures fell 1 percent in early trade, echoing losses in Asia and on Wall Street overnight.

The increasing possibility of a U.S. credit rating downgrade -- with Washington still in a stalemate over government spending -- is weighing on equity markets globally, though there have been no signs of panic selling.

The S&P 500 index finished down 2 percent on Wednesday .SPX, while the futures were up a touch on Thursday.

Fears of a U.S. debt default or downgrade and Europe's own sovereign borrowing crisis have overshadowed most other risks, just as the corporate results season gets going in Asia.

Japan's Nikkei share average was down 1.5 percent .N225. Clothing chain company Fast Retailing (9983.T), whose stock hit a 13-month high on Wednesday, was off 2.3 percent and led the Nikkei lower.

Hitachi Construction Machinery (6305.T), a subsidiary of Hitachi Ltd (6501.T), Japan's largest industrial electronics company, saw its shares jump 4.6 percent after posting a 65 percent annual rise in April-June net profits.

Japan's biggest consumer electronics makers are expected to show quarterly earnings slumped due to the March earthquake, but investors will focus on whether these companies can meet their forecasts for a swift recovery, given a fragile global economy.

"Buying on dips in companies with good earnings may continue, but exporters may not fare well for the time being as long as there are concerns about the U.S. economy," said Hideyuki Okoshi, general manager at Chibagin Securities in Tokyo.

Analysts in Asia Pacific have cut their estimates for September quarter earnings across sectors by an average 0.6 percent, according to Thomson Reuters Starmine's SmartEstimates, which give a greater weighting to more accurate forecasters.

Of these estimates, average downgrades were 4.9 percent for technology firms and 1.4 percent for industrial companies.

The MSCI index of Asia Pacific stocks outside Japan .MIAPJ0000PUS was down 1 percent, with technology, commodity-related and consumer shares the biggest drags.

The index is up 1 percent so far in July compared with a 0.9 percent fall in the MSCI all-country world index .MIWD00000PUS and a 1.2 percent decline in the S&P 500.

ASIA'S GOLDEN OPPORTUNITY?

However, the outlook for Asian earnings is still brighter than elsewhere globally.

Companies in emerging Asia Pacific are expected to generate earnings growth of 18.8 percent next year, exceeding the estimate of 15.8 percent for global emerging markets and 16.8 percent for the world in aggregate, according to Starmine.

However, valuations in some Asian markets do not reflect that premium. For example, Chinese companies are expected to post earnings growth of 20 percent next year, but are trading at 11.8 times 12-month forecast earnings, in line with the global average.

"Investors are now torn between the fear and danger of a U.S. default, even though most pundits still maintain that this will be avoided, and the potential of a golden opportunity to strike and pick up some stocks at bargain prices," said Ben Le Brun, CMC Markets analyst in Sydney.

The Australian dollar has been an attraction for investors in currency markets looking for opportunities in the midst of debt crises in the United States and the euro zone.

The currency rose 0.3 percent to $1.1050, not far from a post-float high of $1.1081 on Wednesday after Australian inflation data.

Having stayed above $1.10 even after the S&P 500 fell 2 percent, the Australian dollar may be forming a base from which it will gradually head higher, analysts said.

Of course, flows into Asia Pacific have reversed quite quickly in the past.

Three years ago as the global financial crisis was coming to a boil, the Australian dollar made a post-float high at $0.9851, with the market convinced that Australia was insulated from the West's sub-prime mortgage fallout. Three months later the currency had dropped to a low of $0.6007.

REDUCING EUROPE EXPOSURE

The euro was flat on the day at $1.4370, still well off its July low around $1.3835.

The deadlock in Washington over the U.S. debt ceiling has not pulled traders' attention away completely from the euro zone, where Italian and Spanish bond yields keep rising relative to German bonds and calm after a second bailout for Greece has evaporated.

Japanese fund managers slashed their euro-zone bond weighting to a record low and cut their U.S. bond allocation, while raising their Japanese bond weighting to a fresh all-time high, a Reuters poll showed.

After falling overnight on a less-than-stellar auction of new 5-year bonds, U.S. Treasuries stabilized. The benchmark 10-year yield was at 2.97 percent, a basis point above where it finished last night in New York.

Focus in credit markets would likely be on U.S. credit default swap rates with a ratings downgrade possible at any time. The 1-year CDS blew out to a record 85 basis points overnight, pushing out the difference over the 5-year CDS to more than 20 basis points.

Gold has also been a big winner as investors seek out hard assets to hedge against risks. Gold rose 0.1 percent to $1,615.04 an ounce after hitting an all-time high of $1,628 on Wednesday.

U.S. oil futures were down 15 cents to $97.25 a barrel, down a second day after hitting a one-month high. Brent futures were up 30 cents to $117.73 a barrel.

(Additional reporting by Ayai Tomisawa in TOKYO and Michael Smith in SYDNEY; Editing by Kim Coghill)