WASHINGTON - The number of newly laid off workers filing for unemployment benefits unexpectedly fell last week to the lowest level in a month.

The Labor Department reported Thursday that applications for jobless benefits totaled 365,000, down by 9,000 from last week. Economists had expected claims to rise slightly.

Even with the unexpected decline, claims remain at a level that indicates the labor market is under stress from the sluggish economy. The four-week average for claims rose slightly to 372,250, up significantly from a year ago when the four-week average was around the 300,000 mark.

Analysts predicted further increases in claims in the weeks ahead, reflecting an economy struggling to overcome a slumping housing market, a severe credit crunch and soaring gasoline prices.

"Over the next few months claims should climb towards the 400,000 mark as companies seek to control costs in the face of persistent very soft demand," predicted Ian Shepherdson, chief U.S. economist at High Frequency Economics.

Ford Motor Co. announced Thursday it would make further cuts in the production of trucks and sport utility vehicles and did not rule out further layoffs and plant closings as the troubled U.S. auto industry is dealing with its worst sales prospects in a decade.

Treasury Secretary Henry Paulson said in a CNBC interview Thursday that the economy is going through a rough patch "but we have policies in place to deal with it." He cited the 130 million economic stimulus payments that are being sent out as the government's chief weapon to combat a deep recession.

On Wall Street, stocks steadied after two sessions of steep declines. The Dow Jones industrial average finished Thursday up 24.43 points at 12,625.62.

The level of jobless claims has been difficult to read over the past few weeks because of troubles adjusting the claims figures to take into account this year's early Easter and the impact of a strike at an auto parts supplier for General Motors.

However, economists note that the trend for claims has been rising since last fall. The number of people receiving unemployment benefits was above the 3 million mark for the week ending May 10, the fourth straight week that has occurred. That is a level of continuing claims that has not been seen since 2004.

The Federal Reserve released a new economic outlook on Wednesday that showed Fed officials now expect economic activity to be much more sluggish this year, with the unemployment rate expected to rise more than the Fed had been forecasting.

The new Fed forecast predicted the unemployment rate will rise to between 5.5 percent and 5.7 percent by the end of this year, up from a forecast in January that projected unemployment would rise as high as 5.3 percent. The unemployment rate is now 5 percent.

The Fed projected that overall economic growth would slow to between 0.3 percent and 1.2 percent this year, down from the January forecast for growth that estimated growth of between 1.3 percent and 2 percent.

The Fed has aggressively cut interest rates seven times since September but Fed officials indicated in the minutes of their April meeting, released Wednesday, that interest rates will probably remain on hold at coming meetings because of concerns about inflation.

The economy has slowed to a crawl since the final three months of last year, with some analysts fearing the country has toppled into a recession. However, the Bush administration contends that the current sluggish period will end soon as 130 million households start spending their economic stimulus checks.

The Labor Department said the unemployment rate had risen to a level in Alaska that triggered extended benefits, the first state where that has occurred in the current slowdown.

The jobless claims report showed for the week ending May 10, there were 31 states and territories reporting a decline in unemployment applications and 22 that saw increases.

The largest increase was a rise of 6,637 in Michigan, attributed to higher layoffs in the auto industry. Claims were up by 3,344 in North Carolina and 2,202 in Georgia.

The biggest decline was a drop of 15,244 in New York that was attributed to fewer layoffs in the transportation and service industries. Other big declines in claims occurred in Kentucky, down 4,391 and Wisconsin, down 1,514.

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