The data from early February suggested the 13-month-old US recession was deepening, a conclusion supported by a report that showed factory activity in the country's Mid-Atlantic region contracted sharply in February.

"The data indicates an accelerated deterioration ... jobs are being lost and the pool of unemployed is growing faster," said Kevin Logan, senior US economist at Dresdner Kleinwort in New York. "People cannot find jobs."

US stocks fell as the data reinforced fears the worsening slump would erode company profits, driving the Dow Jones industrial average to 7,465.95, its lowest close since October 2002.

Worries about more heavy borrowing to fund the government's efforts to rescue the economy hammered Treasury debt prices.

The number of unemployed still on the benefits rolls after drawing an initial week of aid surged 170,000 to 4.99 million in the week ended February 7, the Labor Department said.

It was the highest reading on records dating to 1967 and it took the insured jobless rate to 3.7 per cent, the highest since 1983, when the economy was emerging from a 16-month recession.

New applications for unemployment benefits were steady at 627,000 last week, hovering close to a 26-year high and raising the possibility that job losses in the non-farm sector could cross the 600,000 threshold in February.

Steven Wieting, an economist at Citigroup in New York, said the data was "consistent with a very quick sharp rise in the unemployment rate and that's going to continue for the next few months because production data are correcting very sharply."

A researcher at the San Francisco Federal Reserve Bank said in a newsletter that US employment would likely have dropped by about 4 per cent by the time the recession ends, which would mark the steepest fall in 50 years.

The aggressive layoffs and the accompanying insecurity over jobs could lead households, whose net worth has already been eroded by the collapse of the housing and stock markets, to cut spending further, creating a vicious cycle.