U.S. employment fell for a third straight month in August, but the drop was far less than expected and private hiring was a positive surprise, relieving concerns about a stalling economic recovery.

Nonfarm payrolls fell 54,000 as jobs were lost in the government sector, and the unemployment rate edged back up to 9.6 percent, but the private sector, considered a better gauge of labor market health, added 67,000 jobs, according to U.S. Labor Department on Friday.

Economists had forecast a loss of about 100,000 jobs, along with a rise of about 41,000 in private sector payrolls.

The recovery may be wobbly but it is still staggering forward, said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

The data did little to take the political pressure off President Barack Obama over the state of the economy though, or improve the Democratic Party's chances in November's mid-term congressional elections. Obama said his administration would announce new measures next week to help the economy.

The figures take some of the pressure off the Fed to do something quickly to shore up the recovery, but they won't help the administration as the mid-term elections approach, Gault added.

While the jobs data tamped down concerns the recovery could stall, a second report on Friday showed growth in the dominant services sector hit a seven-month low in August, underlining the sluggish nature of the economic recovery.

U.S. stocks rallied, with the broad Standard & Poor's 500 index enjoying its best week in eight and the blue chip Dow Jones industrial average moved back into positive territory for the year.

Prices for safe-haven U.S. government debt fell for a third straight day as traders saw the odds of a double dip recession lessening. The U.S. dollar ended lower against major currencies.

PAYROLLS IN JUNE AND JULY REVISED UP

The loss of 54,000 jobs in August was driven by the government letting go 114,000 temporary workers hired to conduct the decennial census earlier this year, but the Labor Department revised payrolls data for June and July to show 123,000 fewer jobs lost than previously reported.

While the unemployment rate edged up to 9.6 percent from 9.5 percent, in line with expectations, it may have been because discouraged workers came back into the labor force to hunt for jobs and so were re-classified as unemployed.

The loss of census jobs and layoffs at cash-strapped state governments, pushed down federal government payrolls by 121,000 compared to a 161,000 fall in July.

The data also suggested corporate America may be beginning to take on workers again after an initial burst of hiring and production last year to restock shelves left bare during the deepest recession in generations.

The services sector added 67,000 jobs after July's 70,000 rise. Temporary help services, seen as a harbinger of future permanent hiring, rebounded 16,800 after falling in July for the first time since September.

Employment in the goods-producing sector was unchanged last month as a drop in manufacturing offset an increase in construction payrolls, which were boosted by the return of 10,000 striking workers. Manufacturing jobs fell 27,000 after gaining 34,000 in July.

While the average workweek was unchanged at 34.2 hours, hourly earnings rose by 6 cents, which analysts said bodes well for consumer spending. There was also a glimmer of hope for the long-term unemployed. The number of people out of work for 27 weeks and more fell by 323,000 last month to 6.2 million.

OBAMA PROMISES MORE MEASURES

Concerns about a possible double-dip recession had already diminished somewhat this week after data showed strength in the U.S. manufacturing sector and an increase in consumer spending, but the sluggish pace of growth has kept investors on edge.

The scarcity of jobs has hurt consumer spending, which normally accounts for about two-thirds of U.S. economic activity, and left recovery from the worst recession in 70 years sputtering.

Economic growth slowed markedly in the second quarter this year and Federal Reserve Chairman Ben Bernanke said last week the central bank stood ready to take fresh steps to bolster the economy if needed.

Some analysts had expected the Fed to announce an expansion of its bond buying program at its upcoming meeting on September 21, but said they saw no urgency now.

President Obama welcomed Friday's labor market report as positive news, but said more needed to be done to help the economy and he promised an outline of new measures next week.

The economy is moving in a positive direction, jobs are being created -- they're just not being created as fast as they need to given the big hole that we experienced, he said.

Obama's plans could include extending middle class tax cuts, delivering more tax cuts to businesses to encourage hiring, investing in clean energy, and spending more on infrastructure.

But the White House cautioned that the measures should not be seen as a second stimulus package. Lawmakers are in no mood to approve a big new spending plan that would add to the fiscal deficit.

(Additional reporting by Steve Holland and John Whitesides; editing by Tim Ahmann and Clive McKeef)

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