By Lucia Mutikani

WASHINGTON (Reuters) - The number of Americans filing new claims for unemployment benefits increased to a 10-month high last week, suggesting the labor market was losing momentum and keeping hopes of a September interest rate cut from the Federal Reserve alive.

That was reinforced by other data from the Labor Department on Thursday showing producer prices unexpectedly falling in May. The largest decline in prices at the factory gate since October followed news on Wednesday that consumer prices were unchanged in May for the first time in nearly two years.

The U.S. central bank on Wednesday kept its benchmark overnight interest rate in the current 5.25%-5.50% range, where it has been since last July. Fed officials pushed out the start of rate cuts to perhaps as late as December, with policymakers projecting only a single quarter-percentage-point reduction for this year. But economists remained optimistic that the Fed would reduce borrowing costs twice this year, starting in September.

"These data nudge the door a little wider open for the Fed to start cutting interest rates later this year," said Bill Adams, chief economist at Comerica Bank.

Initial claims for state unemployment benefits jumped 13,000 to a seasonally adjusted 242,000 for the week ended June 8, the highest level since last August, the Labor Department said.

Economists polled by Reuters had forecast 225,000 claims in the latest week. It was the third straight weekly rise in claims, leading some economists to believe that cracks were widening in the labor market. Others blamed lingering volatility related to the Memorial Day holiday in late May.

The four-week moving average of claims, which strips out seasonal fluctuations, increased 4,750 to a nine-month high of 227,000. Unadjusted claims shot up 38,530 to 234,707, driven by a 10,311 surge in California. Some economists speculated that the jump could reflect layoffs after a minimum wage hike for fast food workers in the state came into effect in April.

"Initial claims have been drifting up for some time, but the big increase this week leaves the uptrend far harder to dismiss," said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics.

"High long-term rates, tight credit conditions and a gradual softening in demand are starting to weigh more heavily on businesses, and on small companies in particular."

Stocks on Wall Street were mixed. The dollar rose against a basket of currencies. U.S. Treasury yields fell.

SEPTEMBER STILL IN PLAY

Financial markets continued to anticipate that the Fed would begin its easing cycle in September. The Fed has raised its policy rate by 525 basis points since March 2022. The unemployment rate increased to a still relatively low 4% in May for the first time since January 2022.