* Sprint jumps on reports of possible Softbank deal
* S&P cuts Spain to just above junk rating
* Indexes up: Dow 0.3 pct, S&P 0.6 pct, Nasdaq 0.6 pct
By Chuck Mikolajczak
NEW YORK, Oct 11 (Reuters) - U.S. stocks advanced on Thursday after data showed initial jobless claims fell to the lowest level in more than four and a half years, suggesting improvement in a key factor for economic growth.
The number of Americans filing new claims for unemployment benefits dropped by 30,000 to a seasonally adjusted 339,000, according to Labor Department data. Economists polled by Reuters had forecast claims edging up to 370,0000 last week.
The report follows last week's government report that showed a surprising drop in September's unemployment rate to 7.8 percent.
"Claims looked pretty strong, definitely a big drop down. We're starting to hear noise about companies hiring, and that's what the market is waiting for," said Jordan Waxman, managing director Hightower Advisors in New York.
"Without labor market improvement, we can't get a sustainable rally. The numbers seem to be moving in the right direction."
Stock futures were also supported by a note from Citigroup, which upgraded U.S. equities to "overweight," citing cheap equity valuations and aggressive central bank actions to stimulate the economy.
The benchmark S&P 500 index had shed 2 percent over the prior four sessions, its biggest four-day drop since late July, amid concern about the impact of slowing world growth on corporate profits.
Weak global demand has heightened investor worry over the corporate earnings season. As a group, S&P 500 companies' third-quarter earnings are expected to fall 2.9 percent from a year ago, according to Thomson Reuters data for the first decline in three years.
The S&P 500 rose 2.4 percent in September but has dropped 0.6 percent thus far in October as investors' focus has shifted to stock fundamentals.
Other data showed the U.S. trade deficit widened in August to $44.2 billion. U.S. exports fell for a fifth consecutive month and imports declined slightly, hinting at weaker U.S. and global demand.
The Dow Jones industrial average gained 42.92 points, or 0.32 percent, to 13,387.89. The Standard & Poor's 500 Index gained 8.09 points, or 0.56 percent, to 1,440.65. The Nasdaq Composite Index gained 19.25 points, or 0.63 percent, to 3,071.03.
Sprint Nextel Corp shares jumped 13.5 percent to $5.72 as the best performer on the S&P 500 after a source familiar with the matter told Reuters Softbank Corp, Japan's third-largest mobile carrier, is in talks to acquire a majority stake in the No. 3 wireless carrier in the United States.
Clearwire Corp, in which Sprint holds a majority interest, surged 27.3 percent to $1.65. MetroPCS shares dropped 8.4 percent to $11.03 as a Softbank deal would rule out Sprint making a counter-bid for the company which recently agreed to be acquired by Deutsche Telekom AG.
Fastenal Co climbed 8.3 percent to $45.82 after the company posted third-quarter earnings.
Winnebago Industries Inc reported a higher quarterly profit and strong growth in its order backlog as demand for its motor homes grew. Shares gained 2.9 percent to $12.55.