U.S. employers sliced payrolls by 4,000 in August, the first drop in four years, a stark sign that a painful credit crunch that has unnerved Wall Street is putting a strain on the national economy.

The latest snapshot of the employment climate, released by the Labour Department on Friday, also showed that the unemployment rate held steady at 4.6 per cent, mainly because hundreds of thousands of people left the work force for any number of reasons.

Job losses in construction, manufacturing, transportation and government swamped gains in education and health care, leisure and hospitality, and retail.

Employment in financial services was flat. The weakness in payrolls reflected fallout from a deepening housing slump, a credit crisis and financial turbulence that has made businesses more cautious in their hiring.

"I think a lot of businesses are moving to the sidelines to wait and see how things shake out," said Ken Mayland, president of ClearView Economics.

Missed expectations

The report was much weaker than economists were expecting. They were forecasting payrolls to grow by 110,000.

The drop of 4,000 jobs in August was the first decline since August 2003.

The surprisingly weak report provides the Federal Reserve with a reason to lower interest rates when it meets next on Sept. 18.

Federal Reserve chairman Ben Bernanke, in a speech last week, said the Fed stands ready to do all that is needed to keep the credit crunch that has rocked Wall Street from damaging the economy.

Economists increasingly believe the Fed will lower a key interest rate, now at 5.25 per cent, by at least one-quarter percentage point on Sept. 18, its next meeting. The Fed has not lowered this rate in four years.

"Clearly the economy is struggling, and this is the kind of evidence that really makes a strong case for a Fed easing move," Mayland said.

Job gains in June and July turned out to be smaller. The economy added 68,000 jobs in July, compared with 92,000 reported a month ago. For June, 69,000 new jobs were created.

Credit problems spread

The 4,000 jobs cut in August are from both private and government employers. The government actually cut 28,000 jobs, while all private employers added 24,000.

Credit problems began with subprime mortgages held by people with spotty credit histories or low incomes. The problems have spread to some more creditworthy borrowers and intensified in August, unnerving Wall Street. In reaction, the Fed has pumped tens of billions of dollars into the financial system and lowered an interest rate that it charges banks for loans.

Credit is the economy's lifeblood. If it becomes more difficult to obtain, people might tighten their belts and companies might spend and invest less, including cutting back on hiring. That would crimp overall economic activity.

The economy, which grew at a brisk four per cent pace in the April-to-June period, is expected to slow to half that pace in the three months from July through September. Against this backdrop, the unemployment rate is expected to creep higher, reaching close to five per cent by the end of the year.

The unemployment rate, which is derived from a different statistical survey than the payroll figures, held steady as 340,000 people left the workforce. Fewer people in that survey reported finding employment in August compared with July.