The U.S. unemployment rate soared to 8.5 percent last month, a 25-year high, as employers slashed 663,000 jobs and cut workers' hours to the lowest level on record, the government said on Friday.

In a report underscoring the economy's distress, the Labor Department also revised its data for January to show job losses of 741,000 that month, the biggest decline since October 1949. February's drop in non-farm payrolls was unrevised at 651,000.

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 tends to peak well after a recession ends.

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.

U.S. stocks fell on the data, but government bond prices eased as some traders had braced for an even weaker report.

Economists had expected non-farm payrolls to fall by a slightly less severe 650,000 jobs in March, but had anticipated the jump in the jobless rate from February's 8.1 percent.

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.

To combat the deep recession, which next month will become the longest downturn since the Great Depression, the government has put in place a $787 billion package of tax cuts and spending. In addition, the Federal Reserve has pledged to pump trillions of dollars into the economy.

UNQUESTIONABLY HORRIBLE FIGURES

Christina Romer, the head of the White House Council of Economic Advisers, called the figures unquestionably horrible. She told Reuters Television the economy should be growing by the year's end, but that jobs growth would lag.

As painful as it is to say, you have to be a little bit patient, that is unfortunately where we are, she said. We are taking every action we can to make sure we don't see numbers like this a few months from now.

Job losses in March were broad-based. Even government payrolls, normally resilient during downturns, contracted -- the first drop since December. Only education and health services added jobs.

The manufacturing sector shed 161,000 jobs last month, after eliminating 169,000 positions in February; construction payrolls fell 126,000 after a 107,000 loss in February; and the service sector axed 358,000 positions after cutting 366,000 in February.

The report showed it has become increasingly difficult to find new jobs with the recession now in its 16th month. The number of Americans 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, U.S. Bureau of Labor Statistics Commissioner Keith Hall said.

Rising unemployment is cutting into household incomes, which already have been decimated by the collapse in housing and stock prices, restricting consumers' spending ability.

A separate report showed activity in the service sector, which represents about 80 percent of U.S. economic activity, shrank for a sixth straight month in March. The Institute for Supply Management's services index slipped to 40.8 from 41.6 in February, indicating a deepening contraction.

In the jobs report, 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.

The length of the average workweek fell to 33.2 hours in March, the lowest on record, from 33.3 hours the prior month, suggesting further job losses ahead.

We do expect the economy's rate of decline to soften in the second quarter, and for it to hit bottom in the second half of the year, said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. But we don't expect the turnaround to be rapid enough to prevent the unemployment rate hitting 10 percent before it peaks.

(Additional reporting by Ellen Freilich and Pedro Nicolaci da Costa in New York, Editing by Andrea Ricci)

Unemployment