WASHINGTON (Reuters) - Sales at U.S. retailers unexpectedly fell in July and the number of workers filing new claims for jobless benefits rose last week, indicating the recession-hit economy faced a bumpy recovery.

A Commerce Department report on Thursday 13 August showed total retail sales edged down 0.1 percent after increasing 0.8 percent in June, compared with market forecasts for a 0.7 percent gain.

Analysts had expected a boost in retail sales from the government's "cash for clunkers" program, which gives consumers cash to swap aging gas-guzzlers for new, more fuel efficient models.

A separate report from the Labor Department showed first-time applications for state unemployment insurance benefits climbed 4,000 to a seasonally adjusted 558,000 last week.

"Retail sales were unexpectedly weaker than expected, suggesting that the money spent on the 'Cash for Clunkers' plan wasn't spent on other things," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.

"The claims data shows that the labor market, while improving, remains difficult. People are still losing jobs. Less bad doesn't mean good. It's still tough, and it's a wake-up call."

There was more bad news on the home foreclosures front, where RealtyTrac reported that U.S. home loans failed at a record pace in July despite ongoing federal and state programs to avoid foreclosures.

Foreclosure activity jumped 7 percent in July from June and 32 percent from a year earlier as one in every 355 households with a loan got a foreclosure filing, RealtyTrac said.

U.S. government debt prices pared losses after the surprise drop in retail sales. Stock index futures trimmed gains, while the dollar fell against the yen.

The retail sales data cast a shadow over an anticipated rebound in consumer spending in the current quarter. Spending, which accounts for over two-thirds of U.S. economic activity has been pressured by high unemployment.

In another indication of weak consumer demand, U.S. retail giant Wal-Mart Stores Inc reported roughly flat second-quarter profits and a dip in sales.

Consumer spending fell at a 1.2 percent annual rate in the second quarter after edging up 0.6 percent in the January-March period. Despite signs the worst recession in over 60 years was winding down, companies have been reluctant to hire, though the pace of layoffs has slowed down markedly.

The Federal Reserve, in leaving short-term interest rates near zero on Wednesday 12 August, said economic activity was leveling out. But it noted that sluggish income growth and continued job losses were constraining household spending, which was showing signs of stabilizing.

Interest rate futures lowered the chances of an increase in the benchmark federal funds rate to 38 percent in January from 46 percent before Thursday (13 August)'s data.

Excluding motor vehicles and parts, sales fell 0.6 percent in July after rising 0.5 percent the prior month, the Commerce Department said. Analysts had expected a 0.1 percent gain in sales excluding

Gasoline station sales fell 2.1 percent in July, reflecting a retreat in gasoline prices during the month, after surging 6.3 percent in June. Excluding gasoline, retail sales nudged up 0.1 percent. Sales of building materials were down 2.1 percent in July after falling 0.6 percent in June.

But there was some ray of hope for the economy in the Labor Department report. The number of people collecting long-term unemployment benefits slipped by 141,000 to 6.20 million in the week ended August 1, the lowest level since mid-April.

The insured unemployment rate dipped to 4.7 percent from 4.8 percent.

However, there were signs the global economy was beginning to perk up.

Germany and France reported a surprise return to economic growth during the second quarter, ending their recessions earlier than many policymakers and economists expected. Both the German and French economies expanded by 0.3 percent during the period, though the overall 16-nation euro zone still was in negative territory.

(Additional reporting by Mark Felsenthal; Editing by Neil Stempleman)