The U.S. economy rebounded more strongly than initially thought in the second quarter with more of the growth being driven by domestic demand and less by restocking by businesses.

Gross domestic product expanded at a 4.2 percent annual rate instead of the previously reported 4.0 percent pace, the Commerce Department said on Thursday, reflecting upward revisions to business spending and exports.

It was the fastest pace since the third quarter of 2013.

A separate report from the Labor Department showed the number of Americans filing new applications for jobless benefits slipped 1,000 to a seasonally adjusted 298,000 last week. It was the second week of consecutive declines in initial claims and underscored the strengthening labor market fundamentals.

The dollar extended gains against a basket of currencies on the data, while prices for U.S. Treasury debt fell slightly.

U.S. stock index futures were down as traders kept a wary eye on Ukraine, which accused Russia of entering the country.

The composition of growth in the second quarter was even more encouraging, with the sources of growth broad-based.

Domestic demand increased at a brisk 3.1 percent rate, instead of the previously reported 2.8 percent pace. It was the fastest pace since the second quarter of 2010 and suggested the recovery was becoming more durable after output slumped in the first quarter because of an unusually cold winter.

Third-quarter growth estimates range as high as a 3.6 percent rate.

Economists polled by Reuters had expected the second-quarter GDP growth pace would be revised down to 3.9 percent. The economy contracted at a 2.1 percent pace in the first quarter.

Gross domestic income, which measures the income side of the growth ledger, surged at a 4.7 percent rate, consistent with strong job gains during the quarter. That was the fastest increase since the first quarter of 2012.

This alternative growth measure decreased at a 0.8 percent pace in the first quarter.

Corporate profits rebounded from a decline that had been spurred by the expiration of a depreciation bonus.

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, was unrevised at a 2.5 percent rate.

Businesses accumulated $83.9 billion worth of inventory in the second quarter, less than the initially reported $93.4 billion. That saw restocking contributing 1.39 percentage points to GDP growth rather than 1.66 percentage points.

The relatively smaller inventory build means less stock overhang, which bodes well for third-quarter GDP growth.

While trade was a drag for a second consecutive quarter, export growth was raised to a 10.1 percent pace from a 9.5 percent rate. Business spending on equipment and nonresidential structures, such as gas drilling, was revised higher.

Housing market-related spending was revised slightly down as was government spending.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)