The number of Americans filing for unemployment benefits fell more than expected last week, hitting its lowest level since October, pointing to sustained strength in the labor market that should further dispel fears of a recession.    Initial claims for state unemployment benefits declined 18,000 to a seasonally adjusted 259,000 for the week ended March 5, the lowest reading since mid-October, the Labor Department said on Thursday. The prior week's claims were revised to show 1,000 fewer applications received than previously reported.

Claims are being watched for any sign of labor market weakness following a recent massive stock market sell-off that caused financial market conditions to tighten amid fears the economy was heading into recession.

So far, the labor market remains on strong footing, with nonfarm payrolls increasing by 242,000 jobs in February and the unemployment rate holding at an eight-year low of 4.9 percent.

The recession fears have also been soothed by strong consumer spending at the start of the year, as well as signs of some stabilization in the troubled manufacturing sector.

A tightening labor market and firming inflation could see the Federal Reserve gradually raising interest rates this year. The U.S. central bank hiked its benchmark overnight interest rate in December for the first time in nearly a decade.

The dollar rose against the euro following the European Central Bank's decision to lower key interest rates and expand its bond purchase program in an effort stimulate growth in the euro zone. U.S. Treasury debt prices were mixed, while U.S. stock index futures rallied.   

Economists polled by Reuters had forecast claims slipping to275,000 in the latest week. A Labor Department analyst said there were no special factors influencing last week's claims data and no states had been estimated.

Claims have now been below the 300,000 threshold, which is associated with healthy labor market conditions, for a year - the longest run since the early 1970s. Last week's drop saw claims breaking outside their recent 262,000-294,000 range.

The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, fell 2,500 to 267,500 last week, the lowest level since late October.

The claims report showed the number of people still receiving benefits after an initial week of aid dropped 32,000 to 2.23 million in the week ended Feb. 27. The four-week average of the so-called continuing claims fell 4,500 to 2.25 million. 

By Lucia Mutikani - Reuters (Editing by Andrea Ricci)