Employers unexpectedly cut 20,000 jobs in January, but the unemployment rate surprisingly fell to a five-month low of 9.7 percent, according to a government report on Friday that hinted at some labor market improvement starting to take root.

The Labor Department said the economy shed 150,000 jobs in December, compared to 85,000 previously reported, but November was revised to a gain of 64,000, up from 4,000. Annual benchmark revisions to payrolls data showed the economy has purged 8.4 million jobs since the start of the recession in December 2007.

Analysts polled by Reuters had forecast payrolls gaining 5,000 and the unemployment rate to edge up to 10.1 percent in January from 10 percent. Median estimates from the top 20 forecasters expected payrolls to be unchanged last month.

A sharp increase in the number of people giving up looking for work helped to depress the jobless rate. The number of 'discouraged job seekers' rose to 1.1 million in January from 734,000 a year ago.

With Americans increasingly anxious about high unemployment, President Barack Obama has declared that job creation will be his top priority in 2010.

Obama's fellow Democrats fear voters could punish them in November congressional elections if the administration fails to make headway in tackling the high jobless rate.

Financial markets have grown nervous about the prospect of unemployment in the United States remaining high for a long time. The economy resumed growth in the second half of 2009 and labor market healing is crucial for a self-sustaining economic recovery to take root.

The economy grew at a 5.7 percent rate in the fourth quarter, the fastest clip in six years. Growth was driven by businesses reducing their stock of unsold goods less aggressively that in previous quarters.

While job losses in prior months were steeper than previously thought, details of the January report supported views the blood bath has stopped.

Last month, the services sector added 40,000 jobs after shedding 96,000 positions. The figure included a rise in federal government employment, partly as a result of the hiring of staff for the 2010 Census. Temporary help employment rose 52,000, maintaining a rising trend seen in the past month.

Manufacturing payrolls rose 11,000 last month, the first gain since January 2007, after dropping 23,000 in December. But the construction sector, continued to struggle, losing 75,000 jobs, likely because of unusually cold weather. Construction payrolls fell 32,000 in December.

In another sign of labor market improvement, the average workweek unexpectedly rose to 33.3 hours, the highest level in a year, from 33.2 hours in December. Total average hourly earnings increased $18.89 from $18.84 in December.

Manufacturing overtime rose to 3.5 hours, the highest since September 2008.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)

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