Initial claims for US state unemployment benefits fell 37,000 to 391,000, the Labor Department said, well below economists' expectations for 420,000.
But the department cautioned that the way it adjusts the data for seasonal fluctuations may have overstated the strength.
Separately, the Commerce Department said US GDP grew at an annual rate of 1.3 per cent in the second quarter, up from the previously reported one per cent. Consumer spending and export growth both were stronger than earlier estimated.
The figures lifted London's FTSE 100 index for two hours in the afternoon session before stocks sank again.
"Whilst the stronger reading will naturally help to ease fears of an aggressive slowdown in US growth, the positive market reaction told a story more about relief that there was no disappointment, than optimism of US growth. Indeed the GDP induce rally for European stocks was short-lived, with equity prices falling from their highs going into the close," said City Index chief market strategist Joshua Raymond.
The drop in initial claims for unemployment benefits took them below 400,000 for the first time since early August.
The department, however, said the weakness in the labor market in recent years may have led the model it uses to seasonally adjust the data to overstate last week's drop.
The decline also reflected the fading impact of Hurricane Irene, which had caused claims to spike in the Sept. 10 week.
"When you connect these data points together, they indicate a very tepid recovery. We are still experiencing positive growth, which is better than we feared a few months ago," said Paul Ballew, chief economist at Nationwide in Columbus, Ohio.