WASHINGTON (Reuters) - The number of Americans filing new applications for unemployment benefits fell last week, but sharp government spending cuts and an escalating trade war threaten labor market stability.

Initial claims for state unemployment benefits slipped 2,000 to a seasonally adjusted 220,000 for the week ended March 8, the Labor Department said on Thursday. Economists polled by Reuters had forecast 225,000 claims for the latest week.

Claims have settled after spiking in late February amid winter storms and difficulties adjusting the data for seasonal fluctuations around the Presidents Day holiday. Though the labor market remains on solid ground, policies by President Donald Trump's administration pose a downside risk.

Thousands of federal government workers, mostly on probation, have been fired by tech billionaire Elon Musk's Department of Government Efficiency, or DOGE, an entity created by Trump to drastically shrink the government.

Trump views the federal government as bloated and wasteful. Unions representing some of the civil servants have challenged the layoffs, resulting in reinstatements. Agencies have a Thursday deadline to submit plans for large-scale layoffs.

The federal government upheaval has not yet significantly filtered through to official labor market data.

A separate unemployment compensation for federal employees (UCFE) program, which is reported with a one-week lag, showed applications little changed.

Spending cuts have, however, impacted contractors, accounting for the elevation in Washington D.C. claims.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, decreased 27,000 to a seasonally adjusted 1.870 million during the week ending March 1, the claims report showed. Policy uncertainty, which has raised the odds of recession this year, is eroding business confidence and making companies hesitant to increase headcount.

February's employment report showed a broader measure of unemployment jumping to near a 3-1/2-year high last month.

The Federal Reserve is expected to keep its benchmark overnight interest rate in the 4.25%-4.50% range next Wednesday, having reduced it by 100 basis points since September.

Financial markets expect the U.S. central bank to resume cutting borrowing costs in June after it paused its easing cycle in January. The policy rate was hiked by 5.25 percentage points in 2022 and 2023 to tame inflation.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)