GOTHENBURG - Unemployment in the 16-country euro zone rose to a more than 10-year high of 9.6 percent in August and economists warned it will likely worsen further, hurting the prospects for a strong economic recovery.

The European Union statistics office said on Thursday the number of people without work had risen by 165,000 from July to 15.17 million as firms closed factories and laid off workers in the worst economic crisis since World War Two. [ID:nBRQ007544]

Economic analysts said unemployment had not peaked yet even though some companies may now be more prepared to retain workers because the economic outlook was improving.

Nevertheless, euro zone unemployment still seems likely to rise significantly higher, thereby posing a serious threat to growth prospects over both the near and medium term, said Howard Archer of IHS Global Insight.

For a graphic comparing euro zone unemployment and consumer confidence, click here: r.reuters.com/mad59d

The unemployment level in the euro zone compared with July's 9.5 percent and was in line with analysts' expectations. In the whole 27-country European Union, unemployment rose to 9.1 percent in August from 9.0 percent the month before.

Eurostat said 3.2 million people had lost their jobs in the euro zone since August 2008, when unemployment was 7.6 percent.

Spain, whose construction sector has been hit by the global credit crunch, suffered the steepest increase in that time -- from 11.8 percent to 18.9 percent. Ireland's rate almost doubled to 12.5 percent over the year while in Germany, the euro zone's biggest economy, it rose from 7.2 percent to 7.7 percent.

FRAGILE RECOVERY

The euro zone economy is forecast to start expanding in the third and fourth quarters of 2009, but growing unemployment means private consumption is likely to be weak, and analysts expect any recovery to be fragile.

EU leaders have also underlined the risk of social unrest, and a potential political risk, if unemployment keeps growing.

Jennifer McKeown, of Capital Economics, said the moderate rise in unemployment from July to August was marginally encouraging but that unemployment was a lagging indicator and the survey might be painting an overly optimistic picture.

Governments have poured billions of euros into the economy, hoping to prevent job losses and long-term unemployment, and euro zone finance ministers were discussing when to remove the stimuli at talks on the Swedish city of Gothenburg on Thursday.

Some of them, and the EU's executive European Commission, suggested this should happen from 2011.

With consumer prices falling again in September and inflation expectations at record lows, the unemployment data is likely to add to arguments for the European Central Bank to keep interest rates at a record low of 1 percent.

The ECB will take into consideration...that unemployment is a hugely, politically emotive issue, so it will be a factor in the pot when monetary policy is discussed but it is not the overriding indicator, said Investec economist Philip Shaw.

We see ECB policy on hold for the foreseeable future. The ECB is unlikely to tighten policy before it is confident the financial crisis is over, before it is confident that recovery has the necessary traction to be self-sustaining.

The euro zone unemployment compares with 9.7 percent joblessness in the United States, a rate which is a concern for investors because of its impact on the economy. The U.S. government releases its monthly jobs data on Friday. (Reporting by Marcin Grajewski and Timothy Heritage, editing by Dale Hudson and Andy Bruce)

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