NEW YORK (Reuters) - The number of U.S. workers filing new claims for unemployment benefits jumped to a 26-year high last week, according to government data on Thursday that pointed to a rapid deterioration in the economy.

U.S. non-farm productivity rose in the fourth quarter, data showed on Thursday, as companies reduced working hours to cope with a worsening economic climate.

KEY POINTS:

JOBLESS CLAIMS: * The number of people staying on the benefit rolls hit a record high in the week ended January 24, showing the weak labor market has yet to hit bottom. * The department said initial claims for state unemployment insurance benefits rose 35,000 to a seasonally adjusted 626,000 in the week ended January 31, the highest since the week ending October 30, 1982. * The prior week’s number was revised up to 591,000 from 588,000. * Analysts polled by Reuters had forecast 585,000 new claims. * The number of people staying on the benefits roll after drawing an initial week of aid surged by 20,000 to a record 4.788 million in the week ended January 24, the latest week for which the data is available, from 4.768 million the previous week. * The four-week moving average for new claims, considered to be a better gauge of underlying trends as it irons out week-to-week volatility, rose to 582,250, the highest reading since the week ending December 4, 1982.

NON-FARM PRODUCTIVITY * The Labor Department said non-farm productivity rose at a 3.2 percent annual rate from the 1.5 percent increase in the third quarter, while output plunged 5.5 percent, falling at the fastest pace since the first quarter of 1982. * U.S. manufacturing continued to suffer, with productivity declining at a 3 percent pace after a record 3.3 percent decline in the third quarter. * Analysts polled by Reuters had forecast productivity increasing at a 1.4 percent rate. * Unit labor costs, a gauge of inflation and profit pressures closely watched by the Federal Reserve, were up 1.8 percent in the fourth quarter, the preliminary report showed, well below Wall Street’s estimates for a 3 percent increase. * The number of hours worked dropped at an 8.4 percent annual rate during the fourth quarter, the lowest since the first quarter of 1975.

COMMENTS:

GARY THAYER, SENIOR ECONOMIST, WACHOVIA SECURITIES, ST. LOUIS,

MISSOURI:

“We saw the stock market drop because of the jump in jobless claims and that gave some support to the Treasury market. Jobless claims are still rising. There’s no sign of any stabilization yet in the labor market.

“Companies are still trying to cut costs to bring them into line with their weak sales. The fourth-quarter productivity numbers we saw show that they are moving in that direction. Productivity was stronger than expected and unit labor costs rose less than expected. It looks like there will be some more cost-cutting here in the first quarter.”

BORIS SCHLOSSBERG, DIRECTOR, CURRENCY RESEARCH, GFT, NEW YORK:

“It’s pretty ugly. Clearly risk is off the table. And this has hurt the euro against the dollar because risk-aversion flows are going once again into the dollar. This jobless report means the February jobs number could be really bad and goes to show that the economy is convulsing and contracting. The economy clearly is in desperate need of a stimulus.”

FRANK LESH, FUTURES ANALYST, BROKER, FUTUREPATH TRADING LLC,

CHICAGO:

“Not good. It’s a new high, and it took us down in the futures. It’s a negative. There’s some selling in the markets on it. I think this is a precursor for tomorrow, and maybe tomorrow’s numbers will be pushed up after people see this.

“On the other hand, we’re starting to get used to these awful numbers, so it doesn’t have quite the shock value that it once had, but its not going to create any buying, that’s for sure. But largely I would say that it’s been priced into the market by now.”

LOU BRIEN, MARKET STRATEGIST, DRW TRADING GROUP, CHICAGO:

“Treasuries obviously caught a bid off higher-than-expected weekly jobless claims but also the productivity numbers are net positive for the Treasury market as well. These show higher productivity and lower unit labor costs. All things being equal it should give the Treasury market a bid.”

MARKET REACTION: STOCKS: U.S. equity index futures extend losses after initial jobless claims data. BONDS: U.S. Treasury debt prices extend gains. DOLLAR: U.S. dollar gains versus euro.