The Labor Department reported that new applications for unemployment insurance rose to a seasonally adjusted 444,000, up 15,000 from the previous week. Economists had expected claims to drop to 420,000.
That news, plus disappointing sales reports from retailers, sent financial markets down as investors lost hope for an end of the year recovery. The Dow Jones Industrial Average dropped 344.65, or 2.99 percent, to 11,188.23, its worst tumble since June 26, when it fell more than 3.03 percent. The Standard & Poor's 500 index fell 2.99 percent, and the Nasdaq composite index slid 3.20 percent.
Stocks fell even though the price of oil dropped to its lowest in five months on worries that the slowing global economy would curtail energy demand from businesses and consumers.
Many economists expect unemployment will continue to rise for the rest of the year. A separate report on Thursday indicated that hiring by companies in the service sector has declined.
"Across the board, we're seeing evidence that labor conditions are worsening," said Carl Riccadonna, senior economist at Deutsche Bank Securities.
A tougher job market can crimp consumer spending as laid off workers and those who fear for their jobs cut back on their purchases. That can further weaken the economy.
"The second half of this year does not look good," Riccadonna said. "Consumer spending is stalling."
Richard Fisher, president of the Federal Reserve Bank of Dallas, also predicted a weak economy for the next several months.
"I think it is very likely we will suffer anemic growth for the current and perhaps the next couple of quarters," he said in a speech in Houston.
The four-week moving average of claims fell slightly to 438,000, down 3,250 from the previous week. Initial claims stood at 320,000 in the same week last year.
While Thursday's figure is below the six-year high of 457,000 reached in late July, economists attributed some of the earlier increase to an outreach program by the Labor Department to notify individuals about the availability of extended benefits.
The distortions from that program have likely faded, several economists said, meaning that the sluggish economy is increasingly to blame.
"We'll be above 6 percent unemployment by Thanksgiving," said Ken Goldstein, an economist at the Conference Board, a business research group based in New York. "We might even be there by Halloween."
In another sign of labor market weakness, the number of people continuing to receive unemployment benefits rose 6,000 to 3.44 million for the week ending Aug. 23, a five-year high.
That number doesn't include people who have exhausted their regular benefits and have requested extended assistance under an emergency program approved by Congress in June.
The ongoing housing slump and credit crunch caused the economy to shrink late last year and grow only slightly in the first quarter. The economy grew by a robust 3.3 percent in the spring, thanks to a surge in exports and the government's tax rebates.
But David Wyss, chief economist at Standard & Poor's, said that slowing economies in Europe and Japan make it unlikely exports will be able to prop up the economy for the rest of this year.
Growth is slowing in the 15-nation euro zone and inflation is on the rise, putting the European Central Bank in a tight spot. The Frankfurt-based ECB left its interest rate at 4.25 percent and warned of slower economic growth this year of between 1.1 percent and 1.7 percent.
The unexpected jump in U.S. jobless claims could foreshadow more rough news for the job market on Friday, when the Labor Department reports monthly unemployment numbers. Economists expect the department to say that employers eliminated 75,000 jobs in August, which would be the eighth straight month of job cuts.
The department is also expected to report that the unemployment rate rose to 5.8 percent from 5.7 percent in July.
Signs of consumer restraint could be seen in retail sales reports released Thursday. Many stores reported sluggish back-to-school sales, though Wal-Mart Stores Inc. sales came in better than analysts expected.
Companies are responding to the downturn by doing more with less, which led to a jump in productivity this spring, the Labor Department said Thursday.
Productivity, or the amount of output for every hour of work, rose at a 4.3 percent annual rate in the April-June quarter, a full percentage point higher than economists expected.
Meanwhile, labor costs fell 0.5 percent, the department said. The combination of higher productivity with lower costs should help contain inflation and give the Fed some breathing room on interest rates.
Caught between slowing growth and rising prices, the Fed is expected to leave a key interest rate alone at 2 percent when it meets next on Sept. 16.
Dyke Messinger, president of Salisbury, N.C.-based Power Curbers Inc., said his company is constantly seeking to boost the productivity of its 105 employees. The company makes machines that transforms concrete into curbs and gutters.
Power Curbers has increased its revenue per employee by an average of 10 percent per year over the past five years, he said.
Not all the economic news Thursday was negative. The Institute for Supply Management, a private trade group, said its nonmanufacturing index rose to 50.6 in August from 49.2 in July, above analysts' estimates of 50. A reading above 50 indicates growth.
While the economy is weak, it hasn't "fallen off a cliff," said Peter Kretzmer, senior economist at Bank of America.
