The U.S. unemployment rate soared to 8.5 percent in March, the highest since 1983, as employers slashed 663,000 jobs and cut workers' hours to the lowest on record, government data showed on Friday.

In a report underscoring the distress in the labor market, the Labor Department also revised its data for January to show job losses of 741,000 that month, the biggest decline since October 1949.

The drop in non-farm payrolls in February was unrevised at 651,000.

U.S. equity futures and government bond prices fell and the U.S. dollar rose against the yen after the data.

The report, coming in the wake of recent data that have surprised on the upside, did little to alter perceptions the economy's downward momentum was slowing as unemployment was a lagging indicator and tended to peak well after the recession ended, economists said.

The report does not contradict the growing notion that the economy is finding a bottom. Employment will not turn on a dime and certainly there's no sign of strength, but at least it's not getting worse and worse and worse, said Pierre Ellis, senior economist at Decision Economics in New York.

Analysts polled by Reuters had forecast non-farm payrolls falling 650,000 in March. They had forecast the unemployment rate rising to 8.5 percent from 8.1 percent the prior month.

Since the start of the recession in December 2007, the economy has shed 5.1 million jobs, with about two thirds of the losses occurring in the last five months, the department said.

Job losses in March were broad based, with only education and health services adding jobs.

The manufacturing sector shed 161,000 jobs in March, after eliminating 169,000 positions the prior month. Construction industries lost 126,000 jobs after bleeding 107,000 in February. The service-providing industry axed 358,000 positions after shedding 366,000 in February.

In March the number of individuals experiencing long spells of joblessness rose by 265,000 to 3.2 million. Nearly one in four of the unemployed had been jobless for 27 weeks or more, the highest ratio since mid-1983, Bureau of Labor Statistics Commissioner Keith Hall said in a statement.

Rising unemployment is cutting into household incomes, which have already been decimated by the collapse in asset prices, restricting their spending ability.

Illustrating the severity of the unemployment situation, a measure of unemployed people working part-time for economic reasons and those who have given up looking for work, raced to a record 15.6 percent from 14.8 percent in February.

With companies cutting back in response to depressed demand conditions, the length of the workweek fell to 33.2 hours in March, the lowest on record, compared to 33.3 hours the prior month. The factory workweek edged down to 39.3 hours from 39.5 in February.

Weekly overtime hours at factories was steady at 2.7 hours in March. Average hourly earnings rose marginally to $18.50 from $18.47 in February.

(Additional reporting by Ellen Freilich in New York, Editing by Andrea Ricci)

Unemployment