Private payrolls rose less than expected in June and overall employment fell for the first time this year as thousands of temporary census jobs ended, showing the economic recovery is failing to gain traction.

Private hiring rose 83,000 after increasing only 33,000 the prior month, the Labor Department said on Friday. But nonfarm payrolls, dropped 125,000 -- the largest decline since October -- as census jobs fell 225,000.

Overall what this does is it reinforces the market's view that the U.S. recovery is losing steam, said Greg Salvaggio, vice president of trading at Tempus Consulting in Washington.

The unemployment rate fell to 9.5 percent, the lowest level since July, as people left the labor force.

Financial markets had expected employment to fall 110,000 last month, with the jobless rate edging up to 9.8 percent from 9.7 percent in May.

U.S. stock index futures rose modestly amid relief the report was not as bad as some had expected, while Treasury debt prices rose modestly.

The government revised data for April and May to show 25,000 more jobs created than earlier reported.

Public unhappiness with the economy, especially after a record $787 billion package of spending and tax cuts, is eroding President Barack Obama's popularity. Obama, who has has called job creation his No. 1 priority, has tried to put the blame on policies of the previous administration.

With voters in an anti-Washington, anti-incumbent mood, failure to make headway in putting back to work the more than 8 million Americans who lost jobs during the recession could cost the Democratic Party dearly in the November mid-term elections.

Payrolls in the dominant services sector rose 91,000 last month after increasing 20,000 in May. Temporary help employment rose 20,500, while retail hiring fell 6,600.

In the goods-producing sector, payrolls fell 8,000 in June, pulled down by declines in construction as home building dropped sharply following the end of a government tax credit. Manufacturing employment rose 9,000 after a 32,000 gain in May.

With unemployment stubbornly high, household spending has turned sluggish in recent months, threatening to create a vicious cycle that stock market investors and some analysts worry could tip the economy back into recession.

We are in a difficult situation. I don't think there is political will to have another stimulus program and even if we did I am not sure people feel it would be that effective, said Stephen Bronars, a senior economist at Welch Consulting in Washington.

The Federal Reserve is also in a bind. It has held benchmark overnight interest rates close to zero since December 2008 and has pumped more than $1 trillion into the economy. Fed officials believe a sustainable recovery has taken hold, but are watching cautiously.

The average workweek edged down to 34.1 hours from 34.2 hours in May.

(Editing by Andrea Ricci)

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