By Margaret Chadbourn

WASHINGTON, Jan 2 (Reuters) - The U.S. Labor Department should either tighten the procedures that it uses to release market-sensitive data to the media or scrap them altogether and distribute the data directly to the public, a watchdog for the department said on Thursday.

The recommendation to tighten the so-called lockup process, specifically the department's weekly jobless claims figures, was included in an audit released by the Labor Department's Office of Inspector General. The panel was reviewing the process in an effort to prevent the possibility that some investors could have an unfair competitive advantage in buying and selling stocks, bonds and other trading assets.

Under the lockup procedure, media outlets are "locked" in a room where they receive embargoed copies of data reports, usually about 30 minutes before the designated release time, and do not have the ability to post stories until the embargo is lifted.

The lockups were initiated in the mid-1980s.

Government officials are looking to mitigate the crush of high-speed trading systems that have set up systems to retrieve information seconds ahead of the public. High-speed trading has grown significantly in the past decade and is often a key part of some hedge funds' investment strategies.

The lockups allow media outlets to sell data reports to clients, including high-frequency, or algorithmic, trading firms. The firms use computerized trading techniques ahead of individual traders based on the reports.

"Algorithmic trading introduces new security variables into a lockup system not originally designed to guard against market-moving distributions that could be caused by the release of government data to certain traders just seconds before the rest of the general public," the report said.

"A few years ago, a few seconds here or there would not have had much of an impact. Today, fractions of a second can equate to millions or even billions of dollars in market movements."

The audit was mainly focused on the Labor Department's weekly report on jobless claims, but the panel's recommendations could have a broader impact on how other government agencies consider cracking down on lockups.

The lockup process, in which several news outlets participate, covers releases on economic growth, home sales and inflation, among other matters.

The report also found that the Employment and Training Administration, which compiles the jobless claim report, had deficiencies in its procedures governing release of the data.

The Labor Department said it agrees with some of the issues the audit raised surrounding the efficacy of the lockup process.

"We agree with the OIG that it is appropriate to consider ending the weekly claims press lockup," the Labor Department said in a statement.

It said it had already started exploring the value of the press lockup and intends to continue its consideration of how best to disseminate the report to both the public and to news organizations.

Many government officials have already considered potential security problems and have tightened procedures this past year to ensure there are not any broken embargoes.

Media outlets that take part in the lockups include Bloomberg News, Reuters and the Associated Press. Both Dow Jones and Reuters said they had no comment on the recommendations. Bloomberg and the AP were not immediately available for comment.