World stock markets also tumbled Thursday, with Tokyo and Seoul losing almost 7 percent each and Japan suffering its biggest drop in exports in seven years. As trading opened in Europe, Britain's FTSE 100, Germany's DAX and France's CAC-40 all fell more than 2 percent early in the session.
The Labor Department's report showed new applications for jobless benefits rose to a seasonally adjusted 542,000 last week, from 515,000 the previous week. That is above economists' expectations of 505,000, according to a survey by Thomson Reuters.
"This report paints a pretty bleak job picture for mid-November and reinforces the comments from the Fed yesterday almost guaranteeing a sizable Fed rate cut at the next Fed meeting on Dec. 16," economist Cary Leahey told Reuters.
Wall Street hit five-year lows on Wednesday, with the Dow Jones industrial average plunging below the 8,000 mark amid a dour economic outlook from the Federal Reserve and worries over the fates General Motors, Chrysler and Ford.
The Fed projected that the nation's unemployment rate would rise to 6.3 percent to 6.5 percent this year and 7.1 percent to 7.6 percent next year. The level in October was 6.5 percent, and last year the rate averaged 4.6 percent.
The latest bid to give U.S. automakers billions of dollars in government-backed loans remains troubled. Senate Majority Leader Harry Reid, D-Nev., canceled a planned vote Wednesday on a bill that would divert $25 billion for the auto industry from the $700 billion Wall Street financial rescue package.
The Bush administration and congressional Republicans have opposed Democrats' plan to tap into that money to aid the struggling auto indsustry.
The Dow Jones industrial average was down 39.90 points, or 0.50 percent, at 7,957.38. The Standard & Poor's 500 Index was down 6.04 points, or 0.75 percent, at 800.54 in early trading Thursday. The Nasdaq Composite Index was down 5.84 points, or 0.42 percent, at 1,380.58.
Commodities were also down, with oil falling by more than $1.50 a barrel to 22-month lows at $51.95, as the slumping global economy hit demand.