Employers hired more workers than expected in September and job gains for the prior months were revised higher, according to a report on Friday that eased fears the economy was heading into recession.

Nonfarm payrolls rose 103,000 the Labor Department said, while the unemployment rate held steady at 9.1 percent even as new workers poured into the labor force.

Part of September's relative strength reflected the return of 45,000 Verizon Communications workers who had dropped off payrolls in August due to a strike. Excluding those workers, payrolls increased by 58,000.

This is bolstering the case we are not entering a double dip but sort of muddling through, said Robert Lutts, chief investment officer at Cabot Money Management.

U.S. stock index futures turned positive, while government bond prices extended losses. The dollar rose against the yen, but fell versus the euro.

The nation's weak labor market has posed a critical challenge for President Barack Obama, who is gearing up for a tough reelection battle in November 2012. Obama on Thursday used a news conference to press for measures to spur jobs growth that face uncertain prospects in Congress.

The tenor of the report was strengthened by revisions that showed 99,000 more jobs added in July and August than initially reported. In addition, hourly earnings rebounded and the average work week rose.

Economists had expected nonfarm employment to increase 60,000 last month and the jobless rate to hold steady at 9.1 percent.

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Graphic - U.S. non-farm payrolls: http://link.reuters.com/myp34s

Graphic - U.S. nonfarm payrolls by type: http://r.reuters.com/kus53s

Graphic - U.S. jobless rate, payroll change: http://r.reuters.com/was53s

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The government's closely followed employment report was another sign that the world's largest economy was likely to skirt a recession despite weakness over the summer.

We're still not at any kind of job level that could bring the unemployment level down, that still remains a big concern for the economy, said Ellen Zentner, senior U.S. economist at Nomura Securities in New York.

But nevertheless the stronger-than-expected rise in non-farm payrolls today helps provide a little bit of relief to the markets that the U.S. economy is still hanging onto recovery.

Private employment increased 137,000 last month, an acceleration from August's meager 42,000 count. But government payrolls fell 34,000 as employment at the local government level fell 35,000 and the Postal Service shed 5,000 positions.

The drop in local government payrolls reflected a loss of 24,400 education jobs.

Recent reports on manufacturing, business spending and auto sales suggest the economy fared better in the third quarter after growing at an anemic 1.3 percent annual pace in the April-June period.

EUROPE A THREAT

But some economists are warning Europe's debt crisis threatens to all but derail the U.S. recovery.

And while third-quarter growth is expected to top a 2 percent annualized pace, that is still too slow to make a dent in the high unemployment rate.

The economy needs to grow by at least a 2.5 percent rate, with payrolls expanding by 150,000 positions a month, to keep the jobless rate from rising.

The U.S. central bank last month announced new steps to stimulate the economy by pushing long-term borrowing costs even lower by shifting assets on its balance sheet.

Uncertainty over the economic outlook, which continues to be muddied by acrimony in Washington over budget policy and by Europe's inability to get to grips with its debt crisis, is making businesses reluctant to hire aggressively.

But there were some bright spots in the payrolls report. Hourly earnings rose four cents after falling four cents in August.

An improvement in income is crucial for consumer spending, which accounts for about 70 percent of U.S. economic activity.

Incomes dropped in August for the first time since October 2009, curbing spending and pushing savings to the lowest level in more than 1-1/2 years.

The employment report also showed the average workweek rose to 34.3 hours from 34.2 hours.

Health care and social services payrolls increased 40,800 jobs after rising 34,100 in August. The sector has consistently added jobs as the baby boomers demand more health care services.

There were also gains in professional and business services, and retail. Construction employment rebounded strongly, adding 26,000 jobs after declining 7,000 the prior month. Temporary help increased 19,400, slightly less than the previous month's gain.

But manufacturing, which has been the pillar of the economy, shed jobs for a second month.

(Additional reporting by Rodrigo Campos in New York; Editing by Andrea Ricci)