Employment fell for the first time this year in June as thousands of temporary census jobs ended and private hiring grew less than expected, dealing a blow to President Barack Obama who has identified job creation as a key priority.

KEY POINTS: * Nonfarm payrolls dropped 125,000, the largest decline since October, as temporary census jobs fell 225,000, the Labor Department said on Friday. However the unemployment rate fell to 9.5 percent, the lowest level since July, as people left the labor force. * Analysts polled by Reuters had expected employment to fall 110,000 last month, with the jobless rate edging up to 9.8 percent from 9.7 percent in May. * The government revised data for April and May to show 25,000 more jobs created than earlier reported.

COMMENTS:

KURT KARL, CHIEF U.S. ECONOMIST, SWISS RE, NEW YORK:

We've been talking to people who were expecting 25,000 (in private sector jobs), so 83,000 doesn't sound that bad. The census workers at a couple of hundred thousand was about what everyone was expecting, that was not out of line. Manufacturing was up, which is a very positive sign. Average hourly earnings were a little disappointing, a little negative.

We're not in bad shape, but we would love to see a couple of hundred thousand added and not just 83,000.

GREG SALVAGGIO, VICE PRESIDENT OF TRADING, TEMPUS CONSULTING,

WASHINGTON:

Overall what this does is it reinforces the market's view that the U.S. recovery is losing steam. We had the weak housing and manufacturing data yesterday and the weak consumer confidence data earlier in the week. Now we're seeing poor employment data, so there's a growing concern in the market place right now that previously the U.S. was thought to be the economy which was going to drive forward regardless of events happening elsewhere in the world. Now there are some very very serious concerns that the U.S. recovery is beginning to stumble.

KEITH HEMBRE, CHIEF ECONOMIST, FIRST AMERICAN FUNDS,

MINNEAPOLIS, MINNESOTA:

It doesn't look like that good of a report, to be honest. It was certainly positive to see the unemployment rate down to 9.5 percent, but unfortunately that's a function of a lot of people moving out of the labor force.

The labor force change was minus 650,000 people and the participation rate was down to 64.7 from 65 the prior month. So the overall household survey showed employment down 300,000, following a 35,000 decline kind of corroborates some of the weaker payroll figures.

You look at the measures of duration of unemployment, whether on an average of median basis, and they both had new highs too.

For the Fed, it means lower for longer.

TOM PORCELLI, U.S. MARKET ECONOMIST, RBC CAPITAL MARKETS:

The private payroll number was weaker than expected, but not nearly as bad as people feared.

The decline in unemployment appears positive, but the labor force contracted significantly so it might not be positive at face value.

The pace of private hiring is beginning to slow to some extent, it's less than the average of the last few months.

There's not a lot of significant momentum being built up, I don't think this number saps momentum because momentum has already been sapped by the plethora of data on the negative side this week.

ROBERT RUSSELL, PRESIDENT, RUSSELL & COMPANY, FAIRBORN, OHIO:

People in the bond market will be watching this fall of 125,000 in nonfarm payrolls (more closely than the jobless rate).

The impact will be seen positively in Treasuries as people are fleeing into those for safety.

I think the Fed will continue to hold rates where they are because things in the economy are still on shaky ground.

JIM BARRETT, SENIOR MARKET STRATEGIST, LIND-WALDOCK, CHICAGO:

Apparently it's not horrible. I don't think this will change the trends we are in, which is down for stocks and up for bonds.

PETER CARDILLO, CHIEF MARKET ECONOMIST, AVALON PARTNERS:

If you axed government layoffs, it wouldn't be a bad reading.

The basis of it is, the worst of the declines are over and we should be able to gain strength going forward.

Basically this number is in line with what people were expecting, the private sector shows the trend is improving at a slow rate.

MARKET REACTION: STOCKS: U.S. stock index futures extend gains BONDS: U.S. Treasury debt prices fall slightly, then reverse DOLLAR: U.S. dollar gains versus yen, then reverses

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