WASHINGTON (Reuters) - The number of U.S. workers lining up for state jobless benefits surged last week and home building slumped to a record low in December, data showed on Thursday, as the economy’s downward spiral accelerated.

Monty McCleskes fills out an application form at a job fair organized by The News-Press newspaper in Estero, Florida in this January 14, 2009 file photo. REUTERS/Carlos Barria

The worst financial crisis since the Great Depression of the 1930s is forcing companies to slash jobs, creating a vicious cycle for an economy mired in a year-long recession.

This was the first major set of grim economic data to greet President Barack Obama, who took office on Tuesday, and analysts said it underlined the need for swift government action to heal the fractured economy.

The White House said Obama was working to implement a rescue plan quickly, but believed the economic climate could still worsen before getting better.

“The young, new administration woke up to a pounding economic hangover. It’s a hangover that will likely last for some time since no one yet knows how to deal with it,” said Bernard Baumohl, chief global economist at the Economic Outlook Group in Princeton, New Jersey.

Adding to the ranks of unemployed, technology giant Microsoft Corp announced the largest job cuts in its history on Thursday, laying off up to 5,000. Chipmaker Intel Corp and chemical company Huntsman Corp also announced thousands of job cuts this week.

First-time applications for state jobless benefits rose to a seasonally adjusted 589,000 in the week ended January 17 from 527,000 the prior week, the Labor Department said.

This was the highest number since a matching reading in the week of December 20 and exceeded analysts’ forecasts of a rise to 540,000 new claims. The last time claims were higher was in 1982, when they notched a weekly rise of 612,000.

Underscoring the deterioration in the labor market, the number of people remaining on jobless rolls after drawing an initial week of aid jumped 97,000 to 4.61 million in the week ended January 10.

The dour data and Microsoft’s job cuts weighed on U.S. stocks, with the Dow Jones industrial average ending down 105.30 points, or 1.28 percent, at 8,122.80.

Long-dated government bond prices, which normally benefit from signs of growing economic distress, were hurt by U.S. Treasury Secretary-designate Timothy Geithner’s critical comments of China’s currency policies. China is the largest foreign holder of U.S. Treasuries.

DOWNTURN DEEPENING

“The economy is getting worse. At a minimum there is no sign of recovery and more likely the downturn is deepening. We are likely seeing feedback from job losses into the housing market,” said Sal Guatieri, an economist at BMO Capital Markets in Toronto.

Indicating that the recession was worsening, housing starts plummeted 15.5 percent to a seasonally adjusted annual rate of 550,000 units, the lowest since records began in 1959, from 651,000 units in November, Commerce Department data showed.

That was the biggest percentage drop since January 2007, when housing starts fell 16.2 percent, and was sharply below analysts’ expectations of an annual rate of 610,000 units.

New building permits, which give a sense of future home construction, dropped 10.7 percent to 549,000 units, the lowest since tracking of the data began in 1960, from 615,000 units in November and sharply below analysts’ estimates of 610,000.

For the whole of 2008, housing starts plunged 33.3 percent, the biggest decline since 1974, while permits plummeted 36.2 percent, also the largest fall since 1974.

Analysts reckon the economy might not pull out of its current slump unless the housing market, the source of the financial and economic turmoil, stabilizes.

The housing market crash has reduced household wealth, causing a sharp decline in consumer spending, which accounts for about two-thirds of U.S. economic activity.

“These are awful numbers. The U.S. economy cannot emerge from recession unless home prices and sales stabilize and builders begin to break new ground,” said the Economic Outlook Group’s Baumohl.

U.S. mortgage applications dropped last week as a jump in home loan rates sapped demand for refinancing, the Mortgage Bankers Association said on Thursday.

Average 30-year mortgage rates rose 0.35 percentage point in the week ended January 16 to 5.24 percent, after touching the lowest level in the history of the trade group’s survey, which dates to 1990.

Separately, data from a U.S. housing regulator showed home prices accelerated their decline in November, falling 1.8 percent after dropping 1.1 percent in October.

The National Association of Home Builders said on Wednesday U.S. home builder sentiment sagged in January to its lowest since records started in 1985.