The fewest Americans in more than three years claimed jobless benefits last week and wholesalers bulked up inventories in February, the government said in reports that underscored a pick-up in the economic pace.

First-time claims for state unemployment insurance fell an unexpectedly steep 14,000 in the week ended April 3 to 328,000 - their lowest level since just before President George W. Bush took office, the Labour Department said.

A private-sector report showed manufacturers' business had improved markedly and that they likely will hire more in coming months - positive news for Bush as he seeks re-election in November while Democrats hammer his record of overall job losses.

The surprisingly big fall in jobless claims took the lion's share of attention as it persuaded many analysts that a trend towards more hiring now seemed to be in place when coupled with last week's report of 308,000 new jobs in March.

"Clearly good news," said economist Pierre Ellis of Decision Economics Inc. in New York. "What appears to be the resumption of new hiring should combine with this reduction in layoffs to promote strong employment growth."

Stock prices initially rose on the economic news but gave up most of the gains by day's end on heightened fears about security as fighting raged in Iraq.

The Dow Jones industrial average ended down 38.12 points, or 0.36 per cent, at 10,442.03 while the technology-focused Nasdaq Composite Index held on to a slim gain of 2.62 points, or 0.13 per cent, to end at 2,052.86.

Bond prices weakened on expectations the Federal Reserve may push rates up sooner than had been thought as the economy adds strength.

However, former Fed governor Laurence Meyer said he sees an interest rate hike as more likely later than sooner, saying a move early in 2005 is more plausible than one in June, as some analysts have predicted.

And Fed vice-chairman Roger Ferguson said in San Francisco that while keeping interest rates too low too long risked sparking inflation, it would take time to gauge whether the job improvement would prove lasting.

The Commerce Department reported that US wholesale companies saw improved sales and built inventories in February, which also implied underlying strength by suggesting companies were gearing up to feed growing demand.

Wholesale inventories grew by a larger-than-expected 1.2 per cent in February, way above Wall Street forecasts for a 0.3 per cent increase and the biggest jump since November 1999.

Sales by wholesalers shot up 1.3 per cent in February. The stock-to-sales ratio, which gauges how long it would take to deplete inventories at the current sales pace, remained at a record low 1.17 months for a third straight month.