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Nonfarm payrolls increased 54,000 last month, the Labor Department said on Friday, with private employment rising 83,000, the least amount since June. Government payrolls dropped 29,000.

Economists polled by Reuters had expected payrolls to rise 150,000 and private hiring to increase 175,000 in May. The government revised employment figures for March and April to show 39,000 fewer jobs created than previously estimated.

The job creation slowdown confirmed the economic weakness already flagged by other data from consumer spending to manufacturing. It could stoke fears about the depth and duration of a slowdown that started early in the year.

The Labor Department said severe weather last month, including tornadoes and flooding, in the Midwest and the South did not materially affect data collection.

It also said that while some workers in those regions may have been temporarily displaced from their jobs, it found "no clear impact of the disasters on the national employment and unemployment data for May."

Economists still believe the lull in activity will be temporary. They cite high gasoline prices, bad weather and disruptions to motor vehicle production because of a shortage of parts from Japan as factors weighing on growth.

"It is clear we have temporarily entered a soft patch," said Christopher Probyn, chief economist at State Street Global Advisors in Boston, before the report.

"Nobody knows how soft and how long, but the best case view is that the fundamentals of the recovery remain intact and the economy will re-accelerate in the second half of the year."

The report provides one of the best early reads on the health of the U.S. economy and it regularly sets the tone for global financial markets. Worries about the pace of the U.S. economic recovery weighed on stocks on Thursday.

While the recent string of weak data has sparked talk about the need for the Federal Reserve to extend its asset purchasing program when it expires this month, analysts believe policymakers will take a soft payrolls report in stride.

Officials at the U.S. central bank regard the current downshift in the economy as temporary.

The Fed has been mapping out a strategy on how to start removing some of the massive stimulus it has lent the economy, and officials have made clear the bar for a further easing in monetary policy is high.

TEMPORARY FACTORS AT PLAY

"We should keep in mind that we have seen a lot of factors weighing on the U.S. economy in April and May, and should take this report with a pinch of salt," said Harm Bandolz, chief U.S. economist at UniCredit Research in New York.

"We may see some positive surprises in the second half of the year once the impact fades."

High gasoline prices hurt consumer spending in the first quarter, restricting economic growth to a 1.8 percent annual pace after expanding at a 3.1 percent rate in the October-December period.

The economy has regained only a fraction of the more than 8 million jobs lost during the recession. Economists say payrolls growth above 300,000 a month is needed to make significant progress in shrinking the pool of 13.9 million unemployed Americans.

The unemployment rate rose to 9.1 percent last month from 9.0 percent in April as some discouraged workers who had been inspired by the pick-up in hiring in April re-entered the labor market.

"There is so much slack in the labor market it's going to take a long time to get the unemployment rate down to between 6 and 7 percent. That's going to take years," said Stephen Bronars, a senior economist at Welch Consulting in Washington.

That could be bad news for President Barack Obama, whose chances of re-election next year could hinge on the health of the economy, particularly the labor market.

The employment report showed weakness across the board, with the private services sector adding 80,000 jobs last month after increasing payrolls by 213,000 in April.

Within the private services sector, leisure and hospitality fell, showing no boost from McDonald's recruitment of about 50,000 new staff in April, which was after the survey period for that month's payrolls. Spring is traditionally a strong hiring period for McDonald's.

Retail employment, which recorded its largest increase in 10 years in April, fell 8,500 last month. Manufacturing payrolls growth contracted 5,000 last month, while construction employment rose 2,000.

The report showed the average work week steady at 34.4 hours and few signs of wage inflation, with average hourly earnings rising 6 cents.

(Reporting by Lucia Mutikani, Editing by Andrea Ricci)

U.S. employment gains probably lost steam in May as high energy prices and the supply chain effects of Japan's earthquake and tsunami bogged down the economy.

Nonfarm payrolls likely increased by 150,000 last month, according to a Reuters survey of economists after advancing by an 11-month high of 244,000 jobs in April.

Recent economic data such as regional manufacturing data has pointed to a slowing economy, although some analysts believe the data indicates the recovery has hit a soft patch.

After closing at its highest level since June 2008 on April 29, the S&P 500 has dropped 3.7 percent.

Other data set for release include May's U.S. ISM non-manufacturing index at 10 a.m. EDT <1400 GMT>, which is likely to provide further evidence on the pace of recovery in the world's largest economy. Economists looked for a reading of 54 versus the prior month's 52.8.

S&P 500 futures fell 3.7 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures dipped 31 points, and Nasdaq 100 futures lost 7.5 points.

Hackers broke into Sony Corp's (6758.T)(SNE.N) computer networks and stole information about more than 1 million customers, further exposing the vulnerability of the electronics giant's systems.

European shares slipped early Friday, extending this week's selloff on global growth worries and on cautious ahead of the U.S. labor report. .EU

Asian stock markets were mixed Friday, with LG Electronics Inc (066570.KS) losing ground in Seoul on concerns about its earnings outlook, while new listings in Hong Kong attracted strong demand.

U.S. stocks ended a volatile trading session Thursday mostly flat as investors were reluctant to make bets a day before the payrolls report.

(Reporting by Chuck Mikolajczak; editing by Jeffrey Benkoe)

Treasury Secretary Timothy Geithner, seeking to convince Congress to increase his borrowing authority and prevent a government default, went to Capitol Hill to press his case in a 45-minute meeting with first-term lawmakers.

"I am confident that two things are going to happen this summer," Geithner told reporters after the meeting. "One is that we are going to avoid a default crisis and we are going to reach agreement on a long-term fiscal plan."

The meeting occurred just hours after Moody's Investors warned that slow-moving deficit talks led by Vice President Joe Biden, hindered by entrenched positions on both sides, had increased the odds of a short-lived default by Washington.

Moody's warning increases pressure on President Barack Obama and House of Representatives Speaker John Boehner, the top Republican in the U.S. Congress, to strike a deal soon or risk upsetting global financial markets.

Geithner has predicted a financial catastrophe if Congress fails to increase the current $14.3 trillion borrowing cap by August 2, when his department will exhaust the extraordinary cash management measures it has been using since reaching the debt limit on May 16.

Geithner said he had a "good meeting" with the first-term lawmakers, but some of the skeptical Republicans, who oppose increasing the debt limit without implementing deep spending cuts, were less pleased.

"It is frustrating when the secretary talks in circles and that is very unfortunate," said Representative Stephen Lee Fincher. "We are all big boys and girls. We need a framework put forward and we are not seeing that out of this administration, only seeing talk, talk and talk."

Representative Kristi Noem, a favorite of the fiscally conservative Tea Party movement, said the freshmen Republicans made it clear to Geithner that they would not "give this administration a blank check to spend even more."

"Secretary Geithner doesn't get it," said Noem, one of the "mama grizzlies" touted by ex-Alaska Governor Sarah Palin.

But a Treasury official characterized the talks with lawmakers as friendly and constructive.

POLITICAL GRANDSTANDING

Saying the risk of "continuing stalemate" between the two sides had grown, Moody's urged progress on deficit reduction soon before politics takes over in the run-up to the November 2012 presidential election.

"We think this is an opportunity," Steven Hess, sovereign credit analyst for Moody's, told Reuters. "If this opportunity goes by without them realizing a serious long-term debt/deficit reduction program, then we think that until the presidential election, the chances of such an agreement are really much reduced."

Mary Miller, a top Treasury official, said the Moody's statement underscored the need for Congress to move quickly to make sure the United States could meet all its debt obligations while working to reach a long-term fiscal deal.

A U.S. default would roil global financial markets, but few investors are rattled just yet. Wall Street, in large part, expects the debt and deficit negotiations to go down to the wire, as did talks over tax cuts and the 2011 budget.

"We've been through this political grandstanding before," said Jim Kochan, chief fixed-income strategist at Wells Fargo Advantage Funds.

"We always go right down to the day on debt ceiling targets being raised. No congressman and no president wants to be responsible for Social Security payments not going out. This is a minimal risk. We've seen this so many times."

Obama has tasked Biden to lead negotiations with Republican and Democratic lawmakers to find a deficit-reduction deal that would be palatable to Congress and pave the way for the debt limit to be raised. Their talks are due to resume on June 9.

But Republicans refuse to consider tax increases as part of a deal, while Democrats are opposed to Republican proposals to scale back the popular government-run Medicare healthcare program for future retirees.

Republicans seized on the announcement by Moody's, which comes two months after Standard & Poor's revised down its credit outlook on the U.S. rating, as proof of the need to make some sharp spending cuts.

"This report makes clear that if we let this opportunity pass without real deficit reduction, America's financial standing will be at risk," said Boehner. "A credible agreement means the spending cuts must exceed the debt limit increase.

Senator Charles Schumer, a top Democrat, said a compromise that prevents a "catastrophic default on our obligations and significantly reduces the debt is within reach."

(Additional reporting by Rachelle Younglai, Alister Bull and Thomas Ferraro; Writing by Deborah Charles; Editing by Ross Colvin, David Lawder and Eric Walsh)

A raft of grim U.S. data this week has already made investors wary about the near-term economic outlook and pushed 10-year treasury yields below 3 percent for the first time since December this week.

Even as investors weigh whether this signals a soft patch or a prolonged slowdown, markets have begun to come around to the view that this should boost government bonds in the near term as inflationary expectations will be contained.

Brushing aside Thursday's warning from ratings agency Moody's that the risk of a U.S. debt default was small but rising, 10-year Treasuries rose, with yields dipping 1.7 basis points to 3.015 percent from late U.S. trade on Thursday.

Bank of America Merrill Lynch strategists said the popular trade in global bond markets appeared to be putting on curve flatteners as markets expect softer growth and more moderate inflationary pressures.

Anticipating a weak jobs reading later on Friday, analysts have already cut their forecasts on non-farm payrolls growth to 150,000 from 180,000 previously, according to a Reuters poll.

The spread between 10-year notes and two-year bills, a proxy for the curve, has narrowed to about 256 basis points, compared to nearly 290 basis points in early February.

The bullish outlook on bonds rippled over into Asian markets, with local currency bonds enjoying a good run so far this quarter on hopes that aggressive policy tightening in the region may be coming to a close.

Measured in dollar-adjusted terms, total returns for the broader JP Morgan GBI-EM Asian index are 1.44 percent so far this quarter, compared to less than 1 percent in the March quarter. Foreigners have bought nearly five trillion yen ($62 billion) worth of JGBs in the past six consecutive weeks of net buying.

"Tighter monetary policy is still likely, because policy rates are still low relative to current and average historical underlying inflation rates, but if headline inflation rates stabilize, the amount of tightening that we are likely to see in the coming months is mostly priced into bonds," DBS said.

STOCKS STEADY

Still, a weak reading on payrolls could further dent demand for risky assets at a time when the end of the Federal Reserve's $600 billion bond purchase program is in sight and U.S. policymakers appear reluctant to offer more support to the ailing economy.

Japan's Nikkei .N225 share index fell 0.5 percent after losing 1.7 percent on Thursday, with political uncertainty continuing to weigh on sentiment, though cheap valuations and options-related short covering may provide some support.

The MSCI index of Asia Pacific shares outside Japan was broadly steady with industrial and financial stocks leading gains.

Stocks have had a mixed week as PMI data on Wednesday showed factory growth slowed in major Asian countries thanks to tightening credit conditions and a severe drought in parts of China, though some bargain hunting meant markets were set to post their first weekly gain in six weeks. Similar reports showed slowdowns in manufacturing growth in Europe and the United States.

But in a sign that valuations are getting attractive again, the MSCI Asia ex-Japan forward 12-month earnings currently is at 11.8 compared to an average of around 12.8 this decade while forecasts for earnings growth have steadily risen over the past 6 months, according to Thomson Reuters data.

Fund flow data also paint a brighter picture. EPFR Global-tracked funds showed Asia-ex-Japan equity funds were the only major emerging markets fund group to post inflows in the last week of May.

Moody's threat of a U.S. ratings downgrade along with reports that Greece had agreed to new deficit-cutting measures took the wind out of the dollar's strong run, with the euro hitting a one-month high against the dollar.

Against a basket of currencies, the dollar held steady against a basket of major currencies at 74.318 .DXY, having touched a one-month low of 74.209 earlier on Friday with market players increasingly wary of a pull back.

"Unless there is a truly extreme result, I don't think the market will get all excited about the chances for QE3 and further dollar weakness," said Makoto Noji, senior bond and currency strategist for SMBC Nikko Securities in Tokyo, referring to any fresh round of asset buying by the Federal Reserve.

Moody's warnings revived safe-haven demand for gold, with prices holding around the $1534 per ounce line. Brent crude for July delivery edged higher to around the$115.54 a barrel line.

(Editing by Kim Coghill)