LONDON (Bloomberg) — UK jobless claims unexpectedly fell in October, suggesting the labour market is recovering momentum as the prospect of a record budget squeeze looms.

The number of people receiving unemployment benefits declined by 3,700 from September to 1.47 million, the first drop since July, the Office for National Statistics said yesterday in London. The median forecast of 23 economists was for a rise of 6,000. Unemployment measured by International Labour Organisation methods fell 9,000 to 2.45 million people in the quarter through September.

Prime Minister David Cameron is relying on private companies to keep creating work as his coalition government axes as many as half a million jobs to tackle the largest budget deficit since World War Two. With the world economy facing "difficult and dangerous times", growth in the UK is likely to slow, Bank of England Governor Mervyn King said last week.

"Overall, a mildly positive tone to this data and it brings to an end the deteriorating trend we've seen in the unemployment rate since the summer," Alan Clarke, an economist at BNP Paribas in London, said in a telephone interview. "The message is that it's stopped worsening, but isn't improving a lot. Private-sector job creation won't completely offset the public-sector job losses, so we're going to have very sluggish employment growth over the next year."

The pound rose as much as 0.1 percent after the release and was trading at $1.5924 as of 9.47am in London. The yield on the 10-year UK government bond fell three basis points to 3.262 percent.

The UK unemployment rate based on ILO standards fell to 7.7 percent in the three months through September from 7.8 percent in the period through June. That compares with 10.1 percent in the euro region, 9.6 percent in the US and five percent in Japan, the statistics office said.

Employment increased during the period by 167,000, taking the total of people in work to 29.2 million, the ONS said.

Wal-Mart Stores Inc.'s UK Asda supermarket chain said on Tuesday that it expects to create 7,500 jobs next year by adding new stores and expanding its home shopping services.