BRUSSELS - Euro zone unemployment hit a 10-year high of 9.5 percent in July and is seen rising further before a nascent economic recovery supports the job market, denting hopes that consumer spending will boost growth.

The jobless rate in the 16-country euro currency area climbed to its highest since May 1999 as the number of people without work rose by 167,000 from June to 15.09 million, the European Union's statistics office said on Tuesday.

The July unemployment level compared with June's 9.4 percent and was in line with market consensus.

Euro zone unemployment still seems likely to rise markedly higher, thereby posing a serious threat to growth prospects over both the near and medium term, said Howard Archer, economist at IHS Global Insight.

Unemployment is a lagging indicator and it will be some time before any improvement in economic activity feeds through to substantially help the jobs outlook, he said.

The rise in joblessness was highest in crisis-stricken Ireland, Spain, where the global credit crunch has pummelled the construction sector, and in France. In Belgium, unemployment eased. [ID:nBRQ007495]

In the whole European Union of 27 member states, unemployment rose to 9.0 percent of the workforce from June's 8.9 percent, increasing by 225,000 to 21.794 million people.

Governments have been pouring billions of euros into the economy, hoping to prevent job destruction and long-term unemployment in the wake of the worst economic downturn since World War Two.

The high and rising number of unemployed dents consumer confidence and household purchasing power, which in turn prevents a more robust economic recovery despite rising optimism among businesses and increased orders.

Even though some euro zone countries returned to growth in the second quarter and others are likely to follow in the third quarter, we suspect that economic activity will remain too weak to actually generate net jobs until at least the second half of 2010, Archer said.

Clemente de Lucia, economist at BNP Paribas, said mounting fears of unemployment might be a drag on domestic demand.

Employment is expected to continue to contract, pushing higher unemployment, de Lucia said.

With consumer prices falling again in August and consumer inflation expectations at record lows, the unemployment data is likely to add to arguments for the European Central Bank to keep interest rates at record lows of 1 percent even if the economy emerges from recession in the third quarter as many expect.

Rising unemployment is likely to limit euro zone consumer spending, especially as it is also contributing to slowing wage growth. This is countering the boost to purchasing power currently coming from modest deflation, Archer said. (Editing by Dale Hudson)

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