* U.S. jobless benefit rolls hit 26-year high
* New jobless claims fall for second week due to holidays
* Wal-Mart, other retailers report disappointing sales (Adds details)
By Lucia Mutikani
WASHINGTON, Jan 8 (Reuters) - U.S. unemployment benefit rolls swelled to a 26-year high in the last week of December, data showed on Thursday, while retailers, including market leader Wal-Mart, reported poor sales as the year-long economic slump deepened.
The Labor Department said the number of people still on jobless rolls after drawing an initial week of aid jumped 101,000 to 4.61 million in the week ended Dec. 27, the latest for which data is available.
That was the highest since November 1982 and beat analysts' expectations of 4.50 million, underscoring the difficulty people face getting another job when they are laid off.
"You are still seeing a lot of people of collecting unemployment claims, so the underlying conditions are very poor. The bad news in the continuing claims is relentless," said Pierre Ellis, senior global economist at Decision Economics in New York.
While the overall size of the benefit rolls has been marching steadily higher, the number of U.S. workers submitting new claims for state unemployment aid dropped unexpectedly last week, a second consecutive decline.
Initial claims fell 24,000 to 467,000 in the week ended Jan. 3, the department said, well below the 540,000 new claims economists had expected. It was the lowest reading since the week ended Oct. 11, when it was at 463,000.
Normally this would be seen as a suggestion that the labor market's deterioration was abating, but analysts said the decrease was likely due to people holding back applications because of the holidays.
"It covers a holiday period, so people were delaying filing their claims. There is going to be a surge next week," said David Watt, a senior currency strategist at RBC Capital Markets, in Toronto. "I don't think this is indicative of the trend."
RECESSION DEEPENS
The surge in workers drawing benefits reflects a deepening of the recession that started in December 2007, a downturn many economists think could turn into the longest since the Great Depression of the 1930s.
The data came a day before the government issues its report on December nonfarm payrolls. That report is expected to show the economy lost 550,000 jobs last month, with the unemployment rate jumping to 7 percent from November's 6.7 percent.
The collapse of the U.S. housing market and the resulting financial crisis have caused the loss of a huge number of jobs across a wide spectrum of sectors.
Underscoring the steepening slump, the Philadelphia Federal Reserve Bank said on Thursday the pullback in factory activity in the country's Mid-Atlantic region was more severe in December than originally reported. For details, see [IDnN08526247]
Faced with an uncertain economic picture and mounting job insecurity, consumers have cut back on spending.
On Thursday, Wal-Mart Stores Inc
News from the International Council of Shopping Centers (ICSC) was also grim. U.S. chain stores sales fell 1.7 percent in December compared to the same period a year-ago.
"This was an extraordinarily difficult holiday season. Retailers were forced to slash prices to entice consumers to spend," said Michael Niemira, ICSC chief economist.
"But even that strategy was not enough as the elevated worry about job insecurity and increased job layoff announcements continued to restrain consumers' willingness and ability to spend."
The weak retail sales reports and the jobless numbers sent Wall Street stocks tumbling and fueled a safe-haven bid in U.S. Treasury debt, which tends to benefit from news of economic distress.
"The message is the weak economy is hurting the job market and that will affect consumer spending going forward. There is a serious snowballing process under way," said Decision Economics' Ellis.
In yet more evidence of how households continue holding back, a Federal Reserve report showed consumer borrowing plunged by a record $7.94 billion in November after dropping $2.78 billion the previous month.
The tough economic environment has left consumers either reluctant or unable to access credit.
President-elect Barack Obama, seeking swift passage of his proposed massive stimulus plan, warned on Thursday that the economy could remain mired in recession for years without bold action. For details see [ID:nN08508944]. (Additional reporting by Emily Kaiser in Washington, Brad Dorfman in Chicago, Richard Leong and Steven C. Johnson in New York; Editing by Leslie Adler)