U.S. stocks fell slightly Thursday as investors traded cautiously ahead of the government's nonfarm payrolls report due Friday morning.

The Dow Jones Industrial Average declined 5.45 points, or 0.05%, to 10674.98, although it is still up 2% so far this week ahead of the monthly employment data.

American Express was the Dow's weakest component, with a drop of 89 cents, or 2%, to 43.22, while Pfizer dropped 25 cents, or 1.5%, to 16.19 and Microsoft (Nasdaq) slipped 36 cents, or 1.4%, to 25.37.

The Nasdaq Composite shed 10.51, or 0.46%, to 2293.06. The Standard & Poor's 500 index lost 1.43, or 0.13%, to 1125.81, with its technology and financial sectors leading the drop.

The declines followed an unexpected increase in weekly jobless claims that cooled investors' expectations for the government's monthly jobs report due Friday. Thursday's declines were limited by the consumer discretionary sector, which was lifted by encouraging retail sales at Kohl's, Abercrombie & Fitch and Macy's although some other retailers disappointed.

Kohl's climbed 1.91, or 4.1%, to 49, as the department store retailer met analysts' expectations for same store sales and raised its second quarter earnings guidance. Abercrombie advanced 73 cents, or 1.9%, to 39.53, as the teen retailer handily topped analysts' estimates.

Macy's edged up 34 cents, or 1.7%, to 19.78, following better than expected July same store sales and as the company said its back to school season is off to a great start.

The Treasury market posted a broad price rally Thursday as weak jobless claims data fueled jitters ahead of a key payroll report, driving investors into safe assets. The benchmark 10-year note was 14/32 higher to yield 2.905%, the 30 year bond was 18/32 higher to yield 4.055%.

The two year note was 2/32 higher to yield 0.534%. Bond yields move inversely to prices. The release showed initial jobless claims in the U.S. unexpectedly rose to the highest level since April.

It contrasted with data a day earlier indicating better than expected job growth in the private and service sectors that had spurred a bout of selling in the Treasury market.

The Federal Reserve has cited high levels of unemployment as one of the key factors to keep interest rates at a record low near zero since December 2008, a message that is likely to be reiterated when policymakers meet next week to set rates.

Fed Chairman Ben Bernanke in July pointed to an unusually uncertain economic outlook, raising speculation that the low interest rate policy will be maintained well into 2011.

Economists polled by Dow Jones Newswires expect Friday's data to show the U.S. economy cut 60,000 jobs in July, down from 125,000 in June, while the private sector is forecast to have added 100,000 jobs last month. The unemployment rate is predicted to rise to 9.6% from 9.5%.

European market

European shares ended mostly lower Thursday, weighed down by downbeat U.S. employment data, but Germany and France managed to eke out marginal gains.

Earnings reports from European corporate giants, including Barclays PLC and Unilever, also largely disappointed investors. The Stoxx Europe 600 index fell 0.3% to 261.48 points.

Losses accelerated after U.S. data showed that the number of people applying for initial unemployment benefits jumped 19,000 to 479,000. The data came ahead of Friday's eagerly awaited U.S. nonfarm payrolls report for July.

In London, the FTSE 100 index dropped 0.4% to 5,365.78. Shares of Barclays fell 4.7%. The bank reported a 29% rise in first half net profit, but largely thanks to a number of one off gains.

In France, the CAC-40 index ended up 0.1% at 3,764.19, led higher by shares of publishing group Lagardere SCA, which rose 4.3%. The German DAX index edged up 0.04% to 6,333.58. Shares of cosmetics company Beiersdorf AG dropped 5%.

The firm reported growth in second quarter profit, but warned that its consumer business is not back on the growth path of recent years.

Asian market

Asian shares ended mixed Thursday with China-focused real estate developers lower after Beijing recently ordered banks to conduct stress tests.

China's Shanghai Composite index fell 0.7%, Hong Kong's Hang Seng Index ended flat, Japan's Nikkei Stock Average was 1.7% higher and South Korea's Kospi Composite fell 0.3%.

Chinese property developers in Hong Kong and the mainland were pressured after a China Banking Regulatory Commission official, who declined to be named, said the banking regulator had recently ordered lenders to conduct stress tests, based on an extreme scenario in which property prices plunge by around 50%.

This was to gauge the impact on their loans and credit quality, after earlier stress tests indicated positive results.

China Vanke ended down 3.0% and Poly Real Estate Group declined 4.5% in China, while Hong Kong listed developers China Overseas Land fell 3.4% and China Resources Land ended 3.4% lower.

Commodities and metals

Base metals on the London Metal Exchange took a tumble Thursday, closing lower after reports out of China regarding mortgage lending and bank stress tests, coupled with weak U.S. data, weighed on prices.

The markets slumped on news that China, a major metals consumer, plans to tighten mortgage lending in some cities and that its banking regulator recently asked banks to test the possible impact of a plunge in property prices on their loans and credit quality.

Worse than expected U.S. jobless claims, which increased to their highest level since April, also added to investor concerns.

LME three month copper, which has been struggling to hold above $7,500/ton in recent sessions, plunged to an intraday low of $7,331/ton 2.5% off its highs earlier in the day.

Crude futures eased lower for a second day, as concerns about high U.S. unemployment stalled the recent rally. However, prices remain close to the three month intraday high of $82.97 a barrel set Wednesday.

Light, sweet crude for September delivery settled 46 cents, or 0.6%, lower at $82.01 a barrel on the New York Mercantile Exchange.

Brent crude on the ICE futures exchange was recently down 53 cents, or 0.6%, at $81.67 a barrel. Gold futures rose for a seventh consecutive day as weakness in other markets enhanced the demand for refuge assets.

The most actively traded gold contract, for December delivery, settled up $3.40, or 0.3%, at $1,199.30 an ounce on the Comex division of the New York Mercantile Exchange.