U.S. job growth accelerated more than expected in July as private employers stepped up hiring, a development that could ease fears the economy was sliding into a fresh recession.

U.S. payrolls increased 117,000, the Labor Department said on Friday, above market expectations for an 85,000 gain. The unemployment rate dipped to 9.1 percent from 9.2 percent in June, but this was mostly the result of people leaving the labor force.

The payrolls count for May and June was revised to show 56,000 more jobs added than previously reported

The report was the first encouraging piece of economic data in some time.

Fears that U.S. economy might be sliding back into recession, coupled with Europe's inability to tame its spreading debt crisis have roiled global financial markets. Economists see the odds of a recession as high as 40 percent.

U.S. stocks on Thursday suffered their worst sell-off in two years.

Top policymakers at the Federal Reserve will sift through the report when they meet on Tuesday but are not expected to announce any new measures to support the sputtering recovery.

The U.S. central bank has cut interest rates to zero and spent $2.3 trillion on bonds. Policymakers have said they want to see how the economy fares before taking any further action.

GROWTH HAS STALLED

U.S. growth stalled in the first half of 2011, fanning fears of a new downturn. Gross domestic product grew at a 1.3 percent annual pace in the second quarter after a scant 0.4 percent rise in the first three months of the year.

A stand-off between Democrats and Republicans over raising the country's debt ceiling poisoned the atmosphere for employers and consumers. The economy's poor health has eroded President Barack Obama's popularity among Americans and could hurt his chances of reelection.

The borrowing limit was raised this week in a deal that relied on spending cuts. Economists estimate the budget cuts and expiring stimulus -- including a payroll tax cut and emergency unemployment benefits -- could subtract more than a percentage point from GDP growth next year.

PRIVATE HIRING STEPS UP

All the gains in non-farm employment in July came from the private sector, where payrolls rose 154,000 -- an acceleration from June's 80,000 increase and more than the 115,000 expected by economists.

Government payrolls dropped 37,000 in July, a ninth straight month of job losses. The drop was mostly due to a government shutdown in Minnesota that left thousands of state workers without pay checks during the survey period for July payrolls.

With looming budget cuts at the federal government level and state and local governments still tightening their belts, the burden of job creation falls on the private sector.

Within the private sector, most of the job gains were concentrated in the services sector. Temporary help -- a harbinger of permanent hiring - rebounded modestly after declining for three straight months.

Manufacturing payrolls rose 24,000 after increasing 11,000 in June. Most the gains came from the auto sector. Construction employment increased 8,000 after dropping 5,000 in June.

The average work week was steady at 34.3 hours, but average hourly earnings rose 10 cents.

(Reporting by Lucia Mutikani, Editing by Andrea Ricci)

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