April 3 (Bloomberg) -- The number of Americans filing first-time claims for unemployment benefits unexpectedly increased last week to the highest level since just after Hurricane Katrina in September 2005.

Initial jobless claims climbed by 38,000 in the week that ended March 29 to 407,000, the Labor Department said today in Washington. The four-week moving average, a less volatile measure, rose to 374,500 last week from 358,750, Labor said.

The biggest housing recession in a generation, coupled with mounting losses in financial markets, is prompting companies to sack workers and consumers to slow their spending. The Labor Department may report tomorrow the U.S. lost jobs in March for a third month, according to economists surveyed.

``It is reflecting a fundamental weakening in the labor market,'' said Dana Saporta, an economist at Dresdner Kleinwort in New York. ``People that are already unemployed are finding it more difficult to find new jobs. All of this data is consistent with a rising unemployment rate.''

Treasury securities rose and stocks fell following the report. The yield on the 10-year Treasury note fell to 3.56 percent at 10:32 a.m. in New York from 3.60 percent late yesterday. The Standard & Poor's 500 Index fell 0.4 percent to 1362.32.

Economists surveyed by Bloomberg News had forecast initial claims would remain unchanged at 366,000, according to the median of 40 estimates. Estimates ranged from 350,000 to 386,000.

Service Industries Index

A survey from the Institute for Supply Management today showed service industries contracted less than forecast in March. The Tempe, Arizona-based ISM's non-manufacturing index rose to 49.6 from 49.3 in February. A reading less than 50 signals contraction. ISM's employment measure remained unchanged at 46.9.

The number of people remaining on benefit rolls jumped by 97,000 to 2.937 million, the highest level since July 2004, in the week ended March 22, Labor said.

Last week's initial claims may have been pushed higher as some state unemployment offices processed a backlog from the previous week, which included the Good Friday holiday, a Labor Department spokesman said.

Trigger Point

``This is just breaking into recession-type territory,'' Stephen Gallagher, chief U.S. economist at Societe Generale SA in New York, said in an interview on Bloomberg Television. ``400,000 is usually a trigger point when we consider recessionary times.''

The unemployment rate among people eligible for benefits, which tends to track the U.S. jobless rate, rose to 2.2 percent from 2.1 percent. These data are also reported with a one-week lag.

Twenty-two states and territories reported an increase in new claims, while 31 reported a decrease, today's Labor report said.

Initial jobless claims reflect weekly firings and tend to rise as job growth -- measured by the monthly non-farm payrolls report -- slows.

Job losses, falling home prices and slowing retail sales are indicating a worsening economy. Federal Reserve Chairman Ben S. Bernanke this week acknowledged for the first time that a U.S. recession is possible.

Bernanke's Outlook

``It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly,'' Bernanke said in testimony to Congress on April 2. He said he expected unemployment to move ``somewhat higher'' in line with data showing a ``softer labor market.''

The Labor Department tomorrow may report the economy lost 50,000 jobs in March, following a decline of 63,000 jobs in February that was the largest loss in five years, according to a Bloomberg survey of economists. Unemployment rose to 5 percent from 4.8 percent, the economists forecast.

A strike at auto-parts supplier American Axle & Manufacturing Holdings Inc. is contributing to falling jobs at vehicle and parts makers. The walkout has closed or idled 30 plants at GM, affecting almost half of the automaker's workforce.

Homebuilders and housing-related businesses, including lenders and financial service companies with exposure to mortgage-backed securities, are also stepping up firings.

Wall Street banks hit by mortgage losses and writedowns have cut more than 34,000 jobs in the past nine months, the most since the dot-com boom fizzled in 2001, according to the Securities Industry and Financial Markets Association.

This year, banks including Lehman Brothers Holdings Inc., Citigroup Inc. and Morgan Stanley have been reducing staff in fixed income trading, securitization and investment banking. So far, Lehman has eliminated 18 percent of its workforce, Morgan Stanley has cut 6 percent, and Merrill Lynch & Co. has trimmed 4.5 percent, according to the association.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

Last Updated: April 3, 2008 11:12 EDT