The dollar slid to a 15-year low against major currencies on Friday as data showed U.S. payrolls fell last month for the first time in four years, raising recession fears and pressure for the Federal Reserve to cut interest rates.

Traders dumped the dollar after the government said the U.S economy shed 4,000 net jobs last month, the first contraction in employment since August 2003. It also revised downward estimated job gains for June and July.

The payrolls data followed a larger-than-expected decline in July pending home sales reported earlier this week -- more evidence that a credit crunch that began with losses on bonds tied to risky U.S. mortgages was starting to put the brakes on growth.

The jobs data is simply horrific and fans the most pessimistic fears, said Marc Chandler, chief global currency strategist with Brown Brothers Harriman in New York. The housing market woes will undermine the U.S. consumer, push the U.S. economy into recession and drag down growth in much of the rest of the world.

Traders have been increasing their bets that the Fed will cut its 5.25 percent benchmark interest rate by a half percentage point when it meets on September 18.

The Fed cannot keep ignoring the fact that the subprime and credit crisis has indeed hit the real economy, said Kathy Lien, senior currency strategist at DailyFX.com in New York.

Americans are feeling the pain, and this will translate into weak consumer spending, which will drive speculation for a possible recession, she said.

The dollar index, which measures the greenback against a basket of major currencies, tumbled to a 15-year low.

The low-yielding yen was the biggest beneficiary, at one point rising almost 2 percent as investors fled risky trades funded by borrowing the Japanese currency at low interest rates. The dollar last traded at 113.48 yen.

The entire foreign exchange market is going long yen and selling high-yielding currencies, said Matthew Strauss, a senior currency strategist at RBC Capital in Toronto.

The euro was up 0.5 percent at $1.3767.

Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut, called the payroll report one of the bigger real surprises we have had for some time, and (it) can only add significantly to building negative dollar sentiment.

In August, when rising defaults on subprime home loans, made to borrowers with poor credit, began causing market turmoil, the dollar initially benefited from safe-haven flows as investors fled risk for U.S. Treasuries and Americans repatriated funds.

But the greenback has looked increasingly vulnerable this week as liquidity remained scarce and housing and employment data sagged.

Analysts said a Fed rate cut could further weaken the dollar, and yield spreads have moved decisively in favor of the euro in recent sessions.

That was despite the European Central Bank's decision to hold interest rates at 4 percent on Thursday, citing increased market uncertainty as reason for its wait-and-see approach.

But ECB President Jean-Claude Trichet said inflation remains a top concern, suggesting hikes may resume in the future.

The Bank of England, Bank of Canada and Reserve Bank of Australia all held rates steady this week. Only Sweden's central bank broke ranks, raising rates to 3.75 percent on Friday.

With Fed rate cuts now firmly priced in, expect the euro to retest highs near $1.3850 ahead of a rally to $1.40 and above in the coming months, said Nick Bennenbroek, chief currency strategist at Wells Fargo in New York.

(Additional reporting by Steven C. Johnson)

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