* Initial jobless claims drop 23,000 last week
* Four-week moving average of claims fall 4,250
* Continuing claims lowest since week ending June 26
WASHINGTON, Oct 21 (Reuters) - New U.S. claims for unemployment benefits fell more than expected last week, but not enough to suggest much improvement in the distressed labor market.
Initial claims for state unemployment benefits fell 23,000 to a seasonally adjusted 452,000, the Labor Department said on Thursday.
Despite the drop, which also saw the unwinding of the prior week's administrative related-jump, claims remain perched above levels usually associated with a strong job market recovery, making it all but certain the Federal Reserve will ease monetary policy further next month.
Analysts polled by Reuters had forecast claims falling to 455,000 from the previously reported 462,000. The government revised the prior week's figure up to 475,000.
"The larger-than-expected drop is welcome, but we're left wondering whether the drop represents underlying improvement in the labor market or whether it is simply a function of the Columbus Day holiday in which many unemployment offices were closed," Ellen Beeson Zenter, senior U.S. macroeconomist at the Bank of Tokyo-Mitsubishi in New York, said in a research note.
"While jobless claims do seem to be on a downward trend, it can hardly be classified as pronounced and claims hovering around the 450,000 mark implies that little or no job growth exists."
Last week's claims data covered the survey period for the government's October non-farm payrolls report.
A Labor Department official said only the Virgin Islands' claims had been estimated in the most recent week and noted the prior week's claims number had been pushed up by administrative factors related to the Oct. 11 public holiday.
U.S. stock index futures held gains after the data, while Treasury debt prices slightly extended losses. The U.S. dollar was steady at lower levels.
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The Fed is widely expected to announce a second round of asset purchases, also known as quantitative easing, at its Nov. 2-3 meeting to keep interest rates low in an effort to combat high unemployment and boost demand.
The U.S. central bank, which cut its overnight interest rate to near zero in December 2008, has already bought $1.7 trillion worth of Treasury and mortgage-related debt.
The labor market has stumbled as the economy's recovery from the most painful recession 70 years fizzled, leaving the jobless rate at an uncomfortably high 9.6 percent.
Anxiety over high unemployment is expected to cost the Democratic Party control of the U.S. House of Representative in Nov. 2 congressional elections, with rival Republicans also predicted to make big gains in Senate.
The mid-term election is seen as a referendum on President Barack Obama's performance on the economy.
Last week, the four-week average of new jobless claims, considered a better measure of underlying labor market trends, fell 4,250 to 458,000.
Claims for jobless benefits have moved sideways for much of this year and continue to hold below a nine-month high touched in mid-August.
The number of people still receiving benefits after an initial week of aid dropped 9,000 to 4.44 million in the week ended Oct. 9, the lowest level since the week ending June 26, from an upwardly revised 4.45 million the prior week.
Analysts polled by Reuters had forecast so-called continuing claims edging up to 4.41 million from a previously reported 4.40 million.
The number of people on emergency benefits increased 152,112 to 4.04 million in the week ended Oct. 2. (Reporting by Lucia Mutikani; Editing by Andrea Ricci)