* Weekly jobless claims fall 42,000, undo prior week's spike
* Four-week average of claims rises 3,000
* Report allays fears of a major step back in job growth
* Import prices fall 0.5 percent in March, inflation muted
WASHINGTON, April 11 (Reuters) - The number of Americans filing new claims for unemployment benefits fell more than expected last week, easing fears of a marked deterioration in labor market conditions after a surprise stumble in job growth in March.
Initial claims for state unemployment benefits dropped 42,000 to a seasonally adjusted 346,000, the Labor Department said on Thursday, unwinding a jump in the prior week that appeared related to difficulties adjusting the data for seasonal variations.
It was the largest weekly drop since mid-November. Economists, who had expected first-time applications for jobless aid to fall only to 365,000, said the decline suggested the sharp slowdown in employment growth in March was an aberration.
"We will see more job creation this month than we did in March and today's jobless claims numbers are consistent with that expectation," said Robert Dye, chief economist at Comerica in Dallas.
Employers added only 88,000 workers to payrolls in March - the fewest in nine months - after a solid 268,000 increase in February.
Economists said the claims data suggested the slowdown in job creation reflected seasonal hiring being brought forward rather than underlying weakness in the labor market.
"All the March employment report provided a hint of is that jobs that normally would have got hired in March, some of them got hired earlier in February," said Michael Strauss, chief economist at Commonfund in Wilton, Connecticut.
"Seasonal hiring occurred a little bit earlier. The construction sector, for example, was so strong. This claims data supports that as well."
Jobless claims are now back at the lower end of their range for this year, suggesting the labor market recovery remains on track.
The report handed U.S. stocks their fourth straight day of gains, with the Dow Jones industrial average and the Standard & Poor's 500 index scaling fresh all-time highs.
The dollar hit a new four-year high against the Japanese yen , while U.S. Treasury debt prices rose modestly.
EASTER, SPRING BREAKS HEADACHE
Differences in the timing of Easter and school spring breaks, which likely threw off the model used to smooth the data for seasonal fluctuations, had been blamed for the spike in claims during the week ended March 30.
A Labor Department analyst said no states had been estimated and there was nothing unusual in the state-level data for the latest week. He noted, however, that the floating Easter holiday and spring breaks continued to pose challenges for the so-called seasonal factor.
The seasonal distortions in the data will probably remain over the next few weeks.
The four-week moving average for new claims, a better measure of labor market trends, increased 3,000 to 358,000. It remains close to a level economists normally associate with payroll gains of about 150,000 per month.
"My sense is that the economy is generating on an average basis somewhere around 180,000 to 190,000 jobs a month," said Dye. "I do think that is enough to slowly bring the unemployment rate down and provide enough lift to households to help them feel some increase in disposable income."
Separate data suggested weak job growth last month hurt retail sales, but some executives expected business to pick up a bit in April. Several retailers, including Costco Wholesale Corp and T.J. Maxx parent TJX Cos Inc, reported weaker-than-expected March sales.
The nation's 13 top retailers, including TJX Cos and Gap Inc , were expected to report a 1.8 percent rise in same-store sales for March, according to Thomson Reuters, down from an increase of 2.9 percent a year earlier.
Economists are keeping a close eye on jobless claims data for signs of layoffs related to $85 billion in government budget cuts known as the "sequester." Opinion is divided on what impact the spending cuts will have on the labor market.
Claims are also on the radar of the Federal Reserve, which has tied U.S. monetary policy to the labor market.
Minutes of its March 19-20 meeting released on Wednesday showed the U.S. central bank was moving closer to ending its monthly $85 billion purchases of mortgage and Treasury bonds to keep rates low and spur faster job growth.
The meeting was held before the release of March's weak employment report.
A Reuters survey released on Thursday forecast the unemployment rate averaging 7.6 percent this year. The jobless rate dropped a tenth of a percentage point to 7.6 percent in March, but that was due to people leaving the labor force.
A second report from the Labor Department showed little sign of inflation, which should allow the Fed to keep policy very accommodative. Import prices slipped 0.5 percent last month after rising 0.6 percent in February.
In the 12 months to March, import prices dropped 2.7 percent. Prices last month were subdued by a drop in the cost of petroleum and a strong dollar.
"If inflation fears are the primary worry of those members who want to scale things back, well for now, they have little to be concerned about," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.