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Nonfarm payrolls rose only 18,000, the weakest reading since September, the Labor Department said on Friday, well below economists' expectations for a 90,000 rise.

The unemployment rate climbed to a six-month high of 9.2 percent, even as jobseekers left the labor force in droves, from 9.1 percent in May.

"The message on the economy is ongoing stagnation," said Pierre Ellis, senior economist at Decision economics in New York. "Income growth is marginal so there's no indication of momentum.

U.S. stock index futures fell sharply on the data, while U.S. bond prices rose. The dollar rose against the euro.

The government revised April and May payrolls to show 44,000 fewer jobs created than previously reported.

The report shattered expectations the economy was starting to accelerate after a soft patch in the first half of the year. It could prompt calls for the Federal Reserve to consider further action to help the economy, but Fed officials have set a high bar.

The U.S. central bank wrapped up a $600 billion bond-buying program last week designed to spur lending and stimulate growth.

"This confirms our view that the Fed will continue to keep rates on hold into 2012 and if weak employment continues it will be pushed out even further," said Tom Porcelli, chief economist, RBC Capital Markets in New York.

Hopes were high that the economy was starting to find firmer ground as motor vehicle manufacturers ramped up production and gasoline prices descended from their lofty levels.

Economic activity in the first six months of the year was dampened by rising commodity prices and supply chain disruptions following Japan's devastating earthquake in March.

WHITE HOUSE HEADACHES

Signs the labor market is struggling is a major blow for the Obama administration, which has struggled to get the economy to create enough jobs to absorb the 14.1 million unemployed Americans.

The economy is the top concern among voters and will feature prominently in President Barack Obama's bid for re-election next year. So far, the economy has regained only a fraction of the more than 8 million jobs lost during the recession.

"Today's report is more evidence that the misguided 'stimulus' spending binge, excessive regulations, and an overwhelming national debt continue to hold back private-sector job creation in our country," House of Representatives Speaker John Boehner said in a statement.

The economy needs to create between 125,000 and 150,000 new jobs a month just to absorb new labor force entrants.

The private sector added 57,000 last month, accounting for all the jobs created, with government employment shrinking 39,000 because of fiscal problems at local and state governments.

Details of the report showed widespread weakness, though factory payrolls rebounded 6,000 after contracting in May for the first time in seven months, with the recovery reflecting a step-up in motor vehicle production.

Construction employment fell 9,000 last month after declining 4,000 in May. Government employment declined for an eighth straight month as municipalities and state governments continued to wield the ax to balance their budgets.

The report also showed the average workweek fell to 34.3 hours from 34.4 hours. Employers have been reluctant to extend hours because of the uncertainty surrounding the recovery.

Average hourly earnings slipped a penny, more evidence that wage-driven inflation is not a risk.

(Editing by Neil Stempleman)

* Data at 1230 GMT is expected to show that U.S. companies stepped up hiring in June as the economy recovered from a stumble in recent months, although job growth was not expected to be strong enough to eat into high unemployment.

* Nonfarm payrolls are forecast to have risen by 90,000, according to a Reuters survey conducted last week. In May, employment rose a paltry 54,000. Many economists raised their forecasts on Thursday after a stronger-than-expected reading on U.S. private hiring from payrolls processor ADP, and they now expect gains of anywhere between 125,000 and 175,000.

* Caterpillar Inc (CAT.N), the world's largest maker of heavy equipment, said China's regulator had approved its acquisition of U.S. mining equipment firm Bucyrus International (BUCY.O), paving the way for the company to complete a deal announced in November.

* The Commerce Department releases wholesale inventories for May at 1400 GMT. Economists forecast May inventories to rise 0.7 percent versus a 0.8 percent increase in April.

* At 1430 GMT, Economic Cycle Research Institute (ECRI) releases its weekly index of economic activity for July 1. In the prior week the index read 126.4.

* In a startling response to the scandal engulfing Rupert Murdoch's media empire, the British newspaper arm of News Corp (NWSA.O) announced it would publish the 168-year-old News of the World for the last time this weekend.

* The IMF executive board on Friday is expected to approve the disbursement of just over 3 billion euros for Greece, in time to help the country pay debts falling due this month.

* President Barack Obama told top U.S. lawmakers on Thursday he would not sign a short-term extension of the U.S. debt ceiling and said negotiators would work through the weekend on a deal to avoid a debt default.

* Air France-KLM (AIRF.PA) hopes to announce the results of a contest between Airbus (EAD.PA) and Boeing (BA.N) to supply the European airline with wide-bodied jets during the summer, its chief executive said on Thursday.

* Newport Corp (NEWP.O), a U.S. manufacturer and distributor of precision components, is to buy Israeli group Ophir Optronics (OPIR.TA) for $230 million, to strengthen Newport's position in thermal imaging products.

* Google Inc (GOOG.O) is leaving open the door to more co-operation with social-media giants Facebook and Twitter, and believes there is room for multiple social networks as it rolls out its own, executive chairman Eric Schmidt said.

* The FTSEurofirst 300 .FTEU3 index of top European shares rose 0.2 percent on Friday after rising 0.4 percent in the previous session to its highest close in five weeks. Japan's Nikkei average .N225 hit a four-month peak.

* The Dow Jones industrial average .DJI shot up 93.47 points, or 0.74 percent, to 12,719.49. The Standard & Poor's 500 Index .SPX gained 14 points, or 1.05 percent, to 1,353.22. The Nasdaq Composite Index .IXIC climbed 38.64 points, or 1.36 percent, to 2,872.66.

(Reporting by Atul Prakash)

As allegations multiplied that its journalists hacked the voicemails of thousands of people, from child murder victims to the families of Britain's war dead, the tabloid hemorrhaged advertising, alienated millions of readers and posed a growing threat to Murdoch's hopes of buying broadcaster BSkyB.

The announcement, one of the most dramatic in the 80-year-old press baron's controversial career, is widely seen as an effort to prevent the crisis from spreading beyond the News of the World to more lucrative parts of Murdoch's empire.

The scandal has also become a huge embarrassment for British Prime Minister David Cameron because of his close ties to some of the figures at the center of the controversy.

Murdoch's son James, who chairs the British newspaper arm of News Corp, said News of the World has been "sullied by behavior that was wrong."

"Indeed, if recent allegations are true, it was inhuman and has no place in our company," he said in a statement. "The News of the World is in the business of holding others to account. But it failed when it came to itself."

He praised the News of the World for "a proud history of fighting crime, exposing wrong-doing" and setting the nation's news agenda. But he said the paper, which his father bought in 1969, was unviable because of the scandal.

The announcement that the paper's final issue will be on Sunday, July 10 may even be a signal that the famously excessive practices of British tabloid journalism will be less prevalent in the future.

The news came as a complete shock to its 200 staff.

There were gasps and sobbing as they were told of the closure of the 168-year-old title, which from its earliest days in the Victorian era sought to titillate the British working class with sensational journalism about sex and crime.

The profits of the final edition of the News of the World, which was acquired by the Australian-born Murdoch back in 1969 in his first foray into Fleet Street, will go to charity.

"No one had any inkling at all that this was going to happen," said Jules Stenson, features editor of News of the World.

On the surface, it seems like a bold gamble to sacrifice a historic title that had helped establish Murdoch in a British newspaper industry that he has dominated in recent decades.

The closure doesn't mean that Murdoch's problems from the scandal are over. Growing popular and political anger over the phone hacking saga had spurred concerns that there could be snags in securing government approval for News Corp's $14 billion bid for BSkyB, of which it already owns 39 percent.

Stephen Adams, a fund manager at Aegon Asset Management, which is one of the biggest shareholders in BSkyB, told Reuters he saw News Corp's move as aimed at restoring or remedying a tarnished reputation.

"But we also critically see it as a reflection of News Corp's desire to progress the BSkyB bid and have full ownership of the company," he said.

Cameron's right-of-center government had already given an informal blessing to the takeover, despite criticism on the left that it gave Murdoch too much media power.

While the costs of closing the News of the World will be modest, investors and analysts are still concerned about the wider implications of the saga. News Corp's U.S. shares fell more than 5 percent on Wednesday, and edged 0.23 percent lower on Thursday in a rising overall market.

"I don't see how this (BSkyB) deal can go ahead. It's politically totally unacceptable now," said Alex Degroote, media analyst at Panmure Gordon. "To me, it's an explicit admission of culpability."

Still, others said that any attempt to block the BSkyB deal at this late stage would likely spark a legal challenge from News Corp, and one the company would likely win. A delay is likely, "but they can't delay it forever so barring some major development this deal is going to get agreed," said media consultant Steve Hewlett.

The outrage targeted at the News of the World has turned attention on Cameron's own links to the paper, and in particular his friendship with Murdoch's close confidante and head of his British newspaper arm Rebekah Brooks.

Murdoch still faces pressure to remove Brooks, a friend of Cameron's. Her editorship of the News of the World a decade ago is at the heart of some of the gravest accusations.

Cameron has already been hit by the scandal: he chose former News of the World editor Andy Coulson as his communications director, even though Coulson was caught up in the hacking scandal. One of his reporters and a private investigator had been convicted of hacking into phones of members of the royal family, although Coulson insisted he knew nothing about the phone hacking.

As new allegations surfaced, Coulson had to resign from Cameron's team earlier this year. The Guardian newspaper reported on Thursday that Coulson would be arrested on Friday. Police declined to comment.

SUNDAY SUN

It is not yet clear if the scandal will damage James Murdoch, the presumed successor to his father, and other News Corp executives such as Les Hinton, who is now running the company's Dow Jones operation but was previously head of Murdoch's British newspaper arm.

Speculation is rife that the company will turn The Sun, its tabloid daily that is Britain's best-selling newspaper, into a seven-day operation rather than the current six to tap the Sunday market. Despite difficult times for newspapers, the News of the World is still selling 2.6 million copies a week.

The website www.sunonsunday.co.uk was registered on Tuesday by an unknown party.

"Our view is that this does not mean the News of the World will be closed. It will simply mean that there will be a seven-day Sun. The stain on the brand was going to be permanent, and this is a perfectly sensible decision," said Claire Enders, head of Enders Analysis Media Consultancy.

Journalists said that an emotional News of the World editor Colin Myler had read out the announcement at the east London newsroom where Murdoch changed the face of British journalism in the 1980s by breaking the power of the printing unions.

News that Brooks would remain in place as chief executive triggered anger from staff. James Murdoch told Sky News he was satisfied Brooks knew nothing of the crimes allegedly committed when she was editor.

Asked how staff felt toward Brooks, one reporter said there was a sense of "seething anger" and "pure hatred" directed toward her: "We think they're closing down a whole newspaper just to protect one woman's job."

British opposition leader Ed Miliband said Brooks should go, echoing the view of the journalists' trade union. The union said some journalists at The Sun had walked out in support of their colleagues on Thursday evening.

WAR DEAD

Investigations into phone hacking at the News of the World have been bubbling for several years and until recently only celebrities and other well-known figures were believed to have been victims.

But the scandal exploded earlier this week after revelations an investigator working for the paper may have listened to -- and deleted -- the voicemail messages of a missing 13-year-old schoolgirl, later found murdered.

The scandal deepened on Thursday with claims News of the World hacked the phones of relatives of British soldiers killed in action in Iraq and Afghanistan. Britain's military veterans' association broke off a joint lobbying campaign with the paper and said it might join major brands in pulling its advertising.

Many of the paper's readers are ardent supporters of the armed forces so suggestions it may have hacked the phones of the families of grieving service personnel only further alienated a core readership already horrified by suggestions its reporters accessed the voicemails of missing children and bombing victims.

The main accusations are that journalists, or their hired investigators, took advantage of often limited security on mobile phone voicemail boxes to listen in to messages left for celebrities, politicians or people involved in major stories.

Disclosure that the practice involved victims of crime came when police said a private detective working for the News of the World in 2002 hacked into messages left on the phone of murdered schoolgirl Milly Dowler while police were still looking for her.

Police have also been criticized over allegations officers took money from the News of the World for information. London's Evening Standard newspaper said on Thursday that police officers took more than 100,000 pounds ($160,000) in payments from senior journalists and executives at the paper.

Shortly before the announcement the paper would be closing for good, advertising website Brand Republic said the paper had lost all advertising for this weekend's edition.

Before the controversy worsened, formal approval for the BSkyB deal had been expected within weeks after the government gave its blessing in principle. But it now seems unlikely for months, although officials denied suggestions that they were delaying a decision because of the scandal.

"The Secretary of State has always been clear that he will take as long as is needed to reach a decision. There is no 'delay' since there has been no set timetable for a further announcement," a government spokesman said. Some British media reported that a decision was now expected in September.

(Writing by Alastair Macdonald, Jodie Ginsberg and Tiffany Wu; Editing by Jon Boyle in London, Martin Howell in New York)

As allegations mounted this week that its journalists had hacked the voicemails of thousands of people, from child murder victims to the families of Britain's war dead, the tabloid had hemorrhaged advertising and alienated millions of readers.

Yet no one, least of all the 168-year-old paper's staff, was prepared for the drama of a single sentence that will surely go down as one of the most startling turns in the 80-year-old Australian-born press baron's long and controversial career.

"News International today announces that this Sunday, 10 July 2011, will be the last issue of the News of the World," read the preamble to a statement from Murdoch's son James, who heads the British newspaper arm of News Corp.

Hailing a fine muck-raking tradition at the paper, which his father bought in 1969, James Murdoch told its staff that the latest explosion of a long-running scandal over phone hacking by journalists had made the future of the title untenable:

"The good things the News of the World does ... have been sullied by behavior that was wrong. Indeed, if recent allegations are true, it was inhuman and has no place in our Company. The News of the World is in the business of holding others to account. But it failed when it came to itself.

"This Sunday will be the last issue of the News of the World ... In addition, I have decided that all of the News of the World's revenue this weekend will go to good causes.

"We will run no commercial advertisements this weekend."

Steven Barnett, professor of communications at Westminster University, said he was "gobsmacked":

"Talk about a nuclear option," he told Reuters.

"It will certainly take some of the heat off immediate allegations about journalistic behavior and phone hacking."

Tom Watson, a member of parliament from the opposition Labor party who had campaigned for a reckoning from the paper over the phone hacking scandal, said: "This is a victory for decent people up and down the land.

"I say good riddance to the News of the World."

GOVERNMENT TIES

There was no immediate response from members of Prime Minister David Cameron's Conservative-led government, which has found itself embarrassed by the avalanche of allegations this week after it gave its blessing in principle to News Corp's takeover bid for broadcaster BSkyB.

It was unclear whether the company would produce a replacement title for the lucrative Sunday market, in which, despite difficult times for newspaper circulations, the News of the World is still selling 2.6 million copies a week.

One option, analysts said, might be for its daily sister paper the Sun to extend its coverage to a seventh day.

News of the World journalists were stunned. Anger may be directed at top News International executive and Murdoch confidante Rebekah Brooks, who edited the paper a decade ago during the period of some of the gravest new allegations.

"We didn't expect it at all. We had no indication. The last week has been tough...none of us have done anything wrong. We thought we were going to weather the storm," said one News of the World employee who asked not to be named.

The scandal had deepened with claims News of the World hacked the phones of relatives of British soldiers killed in action in Iraq and Afghanistan.

The military veterans' association broke off a joint lobbying campaign with the paper and said it might join major brands in pulling its advertising.

The British Legion said it could not campaign with the News of the World on behalf of the families of soldiers "while it stands accused of preying on these same families in the lowest depths of their misery."

Signaling how far the racy, flag-waving title has alienated a core readership already horrified by suggestions its reporters accessed the voicemails not only of celebrities and politicians, but also of missing children and crime victims, an online boycott petition had garnered hundreds of thousands of signatures.

TELEVISION TAKEOVER

The Conservative-led government had already backed a deal for News Corp to buy out the 61 percent of BSkyB it does not already own, and says the two cases are not linked. But U.S. shares in News Corp fell over 5 percent on Wednesday, though they recovered somewhat in a stronger general market on Thursday.

Formal approval for the deal had been expected within weeks after the government gave its blessing in principle. But it now seems unlikely for months, although officials denied suggestions that they were delaying a decision because of the scandal.

"The Secretary of State has always been clear that he will take as long as is needed to reach a decision. There is no 'delay' since there has been no set timetable for a further announcement," a government spokesman said. Some British media reported that a decision was now expected in September.

Critics, notably on the left of British politics, say giving Murdoch full control of Sky television would concentrate too much media power in his hands and risk skewing political debate.

Cameron has proposed inquiries into the newspaper and into the wider issue of ethics in the cut-throat, and shrinking, news business. Arguments over privacy, free speech and the power of the press have already stirred heated debate this year.

However, critics called Cameron's move to set up official inquiries a tactic to push the embarrassing affair far into the future. The precise form of those inquiries is still unclear.

Labor opposition leader Ed Miliband has called for the BSkyB deal to be referred to the Competition Commission and said that Brooks, Murdoch's most senior British newspaper executive, should quit: "The prime minister has a very close relationship with a number of the people involved in this," said Miliband.

"He should ignore those relationships and come out and say the right thing because that is what the country expects."

PERSONAL TIES

So far, Murdoch has said he will stand by Brooks, 43, who edited the paper from 2000 to 2003, when some of the gravest cases of phone hacking are alleged to have taken place. She is a also a regular guest of the prime minister, and enjoys good relations with previous Labor leaders in power until last year.

Senior politicians from all parties, including Cameron and Miliband, rubbed shoulders with Murdoch, Brooks and other News Corp executives at Murdoch's exclusive annual summer party last month, underlining the power his organization wields.

Both Miliband and Cameron chose former News International employees as media advisers, although Cameron's choice of Andy Coulson, who succeeded Brooks as News of the World editor, has caused the prime minister the more obvious problems.

Coulson quit the paper over the first hacking case in 2007 and went to work as Cameron's spokesman. He resigned from the prime minister's office in January as police reopened inquiries.

The main accusations are that journalists, or their hired investigators, took advantage of often limited security on mobile phone voicemail boxes to listen in to messages left for celebrities, politicians or people involved in major stories.

Disclosure that the practice involved victims of crime came when police said a private detective working for the News of the World in 2002 hacked into messages left on the phone of murdered schoolgirl Milly Dowler while police were still looking for her.

Police have also been criticized over allegations officers took money from the News of the World for information. London's Evening Standard newspaper said on Thursday that police officers took more than 100,000 pounds ($160,000) in payments from senior journalists and executives at the paper.

Analysts believe the global Murdoch empire, which includes Fox television and the Wall Street Journal, can weather a storm of reproach from advertisers, readers and politicians in Britain -- though there were signs of international ramifications.

In Murdoch's native Australia, the leader of the Greens party said he wants the government to examine the ramifications on Australia of the phone hacking scandal.

The secretary general of the Council of Europe, Thorbjorn Jagland, said it was concerned by allegations of breaches of privacy. He said: "Governments need to act resolutely to fight and to prevent violations of this fundamental right, whilst actively protecting and promoting freedom of speech."

(Writing by Alastair Macdonald)

Payrolls processor ADP said on Thursday private sector employment increased 157,000 after a modest 36,000 gain in May, and beating economists' expectations for a 68,000 rise.

A separate report from the Labor Department showed initial claims for state unemployment benefits dropped 14,000 to a seasonally adjusted 418,000 last week. The decline was more than economists's expectations for a fall to 420,000.

The improvement in claims at the start of the third quarter and the pick-up in private hiring were the latest hopeful signs that conditions were now in place for the economy to regain the momentum lost in the first half.

"It's generally a confirmation that the weakness we saw in the May data was more in the way of a bump in the road rather than falling off into some abyss," said David Resler, chief economist at Nomura Securities International in New York.

"The soft patch will prove to be a temporary one, but that doesn't mean we'll be roaring ahead with growth."

The government had been expected to report on Friday that nonfarm payrolls increased 90,000 last month, according to a Reuters survey, after rising only 54,000 in May. However, the ADP report had some economists bumping up their forecasts.

U.S. stock index futures added to gains on the data, while government bond prices extended losses. The dollar rose against the yen.

With gasoline prices falling, automakers cranking up production and the decline in house values moderating, the dark clouds over the U.S. economy are starting to lift.

Separately, first sales reports for June from top U.S. retailers showed better-than-expected sales gains.

Costco Wholesale Corp reported a 14 percent gain in sales at stores open at least a year, suggesting that retailers generally beat Wall Street estimates.

Though jobless claims fell last week, they remained above 400,000, a level that is usually associated with a stable labor market, for a 13th straight week.

The four-week moving average of unemployment claims, a better measure of underlying trends, fell 3,000 to 424,750.

The number of people still receiving benefits under regular state programs after an initial week of aid dropped 43,000 to 3.68 million in the week ended June 25.

The number of people on emergency unemployment benefits declined 44,183 to 3.26 million in the week ended June 18, the latest week for which data is available. A total of 7.46 million people were claiming unemployment benefits during that period under all programs, down 61,327 from the prior week.

(Reporting by Lucia Mutikani, Editing by Andrea Ricci)