U.S. job growth accelerated more than expected in July, tamping down fears the economy was sliding into a fresh recession and giving the Federal Reserve some breathing room.

Nonfarm payrolls increased 117,000 after slowing abruptly in the past two months, Labor Department data showed on Friday. The rise beat economists' expectations for an 85,000 gain.

The unemployment rate dipped to 9.1 percent from 9.2 percent in June, but that was because discouraged job-seekers gave up the hunt. Still, the report was heartening after a rush of disappointing data over the past week.

This shows that the U.S. economy is not dead yet. We have potential to get back on track with moderate growth to a strong recovery next year, said Kurt Karl, head of economic research and consulting at Swiss Re in New York.

The payrolls count for May and June was revised to show 56,000 more jobs were added in those months than previously reported, helping to improve the tenor of the report.

High commodity prices and supply chain disruptions from Japan knocked the recovery off course in the first half of year and left the economy vulnerable to another downturn just two years after the worst U.S. recession since the 1930s ended.

Some economists have put the odds of a new slump as high as 40 percent.

U.S. recession fears and Europe's inability to tame its spreading debt crisis have roiled world financial markets. The data initially helped temper losses in global stocks, which were down for an eight straight day, before worry quickly took hold again.

Stocks on Wall Street opened higher, but gave up gains to trade lower by late morning. Prices for U.S. Treasury debt fell, while the dollar weakened broadly as investors showed a little more appetite for risk-taking. However, gold prices rose in a sign risk-aversion had far from fully dissipated.

UGLY DEBT FIGHT

While private employers showed a renewed appetite to hire last month, there are worries their enthusiasm might have been dampened by the ugly fight between Democrats and Republicans during talks to raise the country's debt ceiling.

Analysts fear this could hamper job growth in August.

The fight over the debt ceiling created a new climate filled with uncertainty and anxiety that will cause businesses to change their clothes, so to speak, and either reduce hiring, freeze hiring, or cut payrolls, said Tony Crescenzi, portfolio manager at PIMCO in Newport Beach, California.

The private sector accounted for all the jobs created in July, with business payrolls rising 154,000 -- an acceleration from June's 80,000 increase and more than the 115,000 expected by economists. Government payrolls dropped 37,000, a ninth straight monthly decline.

The economy's poor health has eroded President Barack Obama's popularity among Americans and could hurt his chances of reelection.

Speaking to veterans at Washington's Navy Yard, Obama called on Congress to take steps to help the economy when lawmakers return from a summer break in September -- renewing his call for an extension of a payroll tax cut and emergency unemployment benefits.

There is no doubt that this has been a tumultuous year. We are going to get through this, things will get better and we will get there together, he said.

Opposition Republican lawmakers renewed calls to cut government spending and ease the regulatory burden on businesses as a prescription for the economy's ills.

The nation's borrowing limit was raised this week in a deal that relied on spending cuts. The fiscal tightening comes at a time when the Fed has a limited arsenal to defend the economy.

The U.S. central bank has cut interest rates to zero and spent $2.3 trillion on bonds. Policymakers, who meet on Tuesday, have said they want to see how the economy fares before taking any further action, and the data fit with their forecasts for a pickup in growth.

Economists say the budget cuts and the scheduled expiration of the payroll tax cut and emergency jobless aid could cut more than a percentage point from GDP growth next year.

EYES ON FED

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.

The public sector job cutbacks are a real drag on growth and the debt ceiling agreement makes it clear that belt tightening will continue to restrain activity for a long time, said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

Monetary policy will have to lean against that headwind and that means the (Fed) could signal next week that it is prepared to keep rates low for a longer period of time than had been expected.

With exception of government, job gains were spread across the board last month. 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.

Temporary help jobs rose marginally, breaking a string of three consecutive declines in a hint that more permanent hiring may be in store.

The average workweek was steady at 34.3 hours, but average hourly earnings rose a strong 10 cents.

(Additional reporting by Donna Smith and Jeff Mason in Washington; Editing by Andrea Ricci)

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