UPDATE 1-U.S. jobless claims hit 17-month low

(Adds details on 4-week average, continuing claims, market reaction)

WASHINGTON (Reuters) - The number of U.S. workers filing new applications for jobless benefits fell last week to the lowest level in about 17 months, suggesting the economy might be on the cusp of job creation.

Initial claims for state unemployment benefits fell by 22,000 to a seasonally adjusted 432,000 in the week ended Dec. 26, from 454,000 in the prior week, initially reported as 452,000, the Labor Department said.

Economists polled by Reuters expected 460,000 new claims in the latest week.

U.S. stock futures added to gains, the dollar rose against the euro and yen and prices for U.S. government bonds extended losses on the data.

"It's consistent with a slow, steady improvement in the labor market but it's hard to translate this number into the nonfarm payroll number next week," said Robert MacIntosh, chief economist, Eaton Vance Corp in Boston. "I think it gives you a better chance of having a positive number. The probability of a positive number is still low, but it's a little bit higher.

The U.S. labor market has shown some signs of healing after two years of heavy job losses as the economy pulls out of a deep recession. Some economists think December marked the first month in two years that there were more jobs created than destroyed. The report on December employment is scheduled for the end of next week.

A Labor Department official said based on seasonal factors, there would normally be a rise in the number of initial claims this time of year. Instead, the unadjusted data showed a decline of about 8,000 applications.

The seasonally adjusted new claims tally was the lowest since the week of July 19, 2008.

The four-week moving average, which irons out weekly fluctuations, fell by 5,500 to 460,250. That was the lowest mark since the week of Sept. 20, 2008, around the time when the collapse of Lehman Brothers sparked a global financial market panic and intensified the recession.

The number of people still claiming benefits after an initial week of aid fell to 4.981 million in the week ended Dec. 19, from 5.038 million in the prior week. (Reporting by Emily Kaiser, Editing by Neil Stempleman)