WASHINGTON (Reuters) - New claims for jobless benefits fell last week and factory activity picked up in the Mid-Atlantic region in early July, signs of a stronger economy that could help push the Federal Reserve to ease its monetary stimulus.

Thursday's data bolsters the view that economic growth could pick up after a dismal first half of the year in which consumers were smacked by tax hikes and deep cuts in the federal budget.

"This is an encouraging sign heading into the second half of the year," said Ryan Sweet, senior economist at Moody's Analytics in West Chester, Pennsylvania.

Fed Chairman Ben Bernanke expects the economy will gather enough steam by the end of the year for the Fed to begin scaling back a bond-purchase program it has used to push down borrowing costs, and Thursday's data appeared to support his case.

The Philadelphia Federal Reserve Bank said factory activity in eastern Pennsylvania, southern New Jersey and Delaware rose to its highest level in more than two years as employment and shipments picked up.

The bank's index of business activity index rose to 19.8 from 12.5 in June, far exceeding economists' expectations. Any reading above zero indicates expansion in the region's manufacturing.

The report adds to early signs that U.S. manufacturing is expanding despite weakness in the global economy. The New York Fed said on Monday factory activity accelerated in New York state in July.

LABOR MARKET RESILIENCE

In a separate report, the Labor Department said initial claims for state unemployment benefits dropped by 24,000 to a seasonally adjusted 334,000. It was the lowest reading since May and a steeper fall than analysts had expected.

The drop in new claims was the latest data to point to resilience in the labor market. While Washington's austerity measures appear to have dragged heavily on growth in the first and second quarters, the pace of hiring has barely slowed, with employers adding 195,000 jobs in June.

At the same time, the labor market data from last week was clouded by seasonal factors. Readings for claims can be volatile in July because many auto factories close to retool, and it is difficult for the government to adjust the data for seasonal swings because shutdown schedules vary from year to year.

Still, a four-week average of new claims, which smoothes out volatility, fell 5,250 from a week earlier.

"This is still consistent with moderate job growth," said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.

The dollar extended a rally against the yen and yields rose for long-term U.S. government debt, signs that investors were betting on tighter monetary policy in the future. U.S. stocks rose to record highs after investment bank Morgan Stanley posted stronger-than-expected profits.

The jobless claims data covered the same week in which the Labor Department looks at employers' payrolls to estimate how many jobs the economy added during the full month. Compared to the survey week for last month, the four-week average for claims was 0.7 percent lower last week.

A third report showed a gauge of future U.S. economic activity held at a near five-year high, with the Conference Board's Leading Economic Index flat at 95.3 last month.

Bernanke, who appeared before lawmakers for the second straight day on Thursday, repeated his message that the Fed would only begin withdrawing its support if the economy improves as much as policymakers expect.

In a potentially negative sign for the labor market, the Labor Department said the number of people still receiving benefits under regular state programs after an initial week of aid rose 91,000 to 3.1 million in the week ended July 6.

However, analysts said the increase could also be related to difficulties in adjusting the data for seasonal swings around America's July 4 holiday.

(This story is corrected to show jobless claims at lowest level since May, not March)

(Reporting by Jason Lange; Additional reporting by Rodrigo Campos and Richard Leong in New York; Editing by Andrea Ricci and Neil Stempleman)

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