WASHINGTON (AP) — The number of people seeking unemployment benefits fell last week below 400,000 for the first time in four months, a sign that the job market may be improving slowly after a recent slump.

Applications for unemployment aid dropped by 7,000 to a seasonally adjusted 395,000, the Labor Department said Thursday. Applications had been above 400,000 for the previous 17 weeks.

The four-week average, a less-volatile figure, fell to 405,000, its sixth straight decline and the lowest level since mid-April. That suggests layoffs have eased.

The decline in applications helped lift stocks. The Dow Jones industrial average rose more than 85 points in the first hour of trading.

Applications fell in February to 375,000, a level that reflects healthy job growth. They soared to an eight-month high of 478,000 in late April, and have declined slowly since then.

There were fewer layoffs last week in the manufacturing, transportation and service industries, according to the report. Only nine states reported an increase in applications.

Paul Dales, senior U.S. economist at Capital Economics said the decline shows the job market is at least not getting worse.

"Of course, it tells us nothing about hiring, which the market turmoil of recent weeks will not have helped," said Dales, noting the 16 percent decline in the Dow Jones industrial average since July 21.

The economy added 117,000 net jobs in July, the government said last week. That was an improvement from the previous two months. But it's far below the average of 215,000 jobs per month that companies created from February through April.

Many employers pulled back on hiring after signs emerged that the economy had weakened from last year. High gas prices and scant wage gains left consumers with less money to spend on discretionary purchases, such as appliances, furniture and electronics. Supply chain disruptions caused by the Japan crisis also dampened U.S. factory production.

The economy expanded at an annual rate of just 0.8 percent in the first six months of the year, the slowest growth in the two years since the recession officially ended.

Steven Wood, chief economist at Insight Economics, said the declining trend in weekly unemployment benefit applications is an encouraging sign for the job market.

"Although the labor market also hit a "soft patch" along with most of the rest of the economy during the spring and early summer, it now appears to be strengthening, at least a little, again," he said.

Still, the outlook for the economy is dim. The Federal Reserve on Tuesday said it expects growth will stay weak for two more years. The Fed also acknowledged that the economy's problems go beyond temporary factors, such as high gas prices.

As a result, the Fed said it would likely keep the short-term interest rate near zero at least through mid-2013.

Economists have slashed their growth estimates. Goldman Sachs Group Inc. expects just 2.5 percent growth in the July-September quarter, down from its previous estimate of 3.25 percent. JPMorgan Chase & Co. reduced its estimate to 1.5 percent, down from as high as 3 percent several weeks ago.

Growth of about 2.5 percent is barely enough to reduce the unemployment rate. The economy needs to grow by 5 percent for a whole year to bring down the rate by one percentage point.

Fears that the U.S. economy could be at risk of falling back into a recession, along with concerns that Europe is struggling to control its debt crisis, have roiled markets in recent weeks. The Dow Jones industrial average has fallen nearly 12 percent so far this month.

Many analysts worry that market turmoil could spook investors and consumers, causing them to take fewer risks and cut back on spending. That would hurt economic growth, making the markets' jitters a self-fulfilling prophecy.

The number of people continuing to receive unemployment benefits fell by 60,000 to 3.69 million. But that doesn't include nearly 4 million additional unemployed people who are receiving extended benefits under emergency programs set up during the recession.

In all, about 7.5 million people received unemployment benefits in the week ending July 23, the latest data available.