U.S. non-farm productivity in the third quarter rose at its fastest pace in six years as companies squeezed more output from a smaller pool of labor and cut costs to deal with a slump in demand, government data showed on Thursday.

The Labor Department said non-farm productivity surged at a 9.5 percent annual rate, the quickest pace since the third quarter of 2003. Productivity grew at a 6.9 percent pace in the April-June period.

Analysts polled by Reuters had forecast productivity, which measures the hourly output per worker, rising at a 6.4 percent rate in the third quarter.

Productivity in manufacturing rose at a record 13.6 percent rate in the third quarter.

Total non-farm output rebounded, growing at a 4 percent rate in the July-September quarter after dropping 1.1 percent in the previous period.

Productivity has increased sharply over the past two quarters, largely driven by aggressive cost cutting by businesses.

Analysts see little room for more cuts and believe that this, coupled with the economy's resumption of growth in the third quarter, may cause companies to start increasing payrolls.

The economy grew at a 3.5 percent annual pace in the July-September period, probably ending the worst U.S. recession since the Great Depression of the 1930s.

Hours worked fell at a 5 percent rate in the third quarter, the Labor Department said. Unit labor costs, a gauge of inflation and profit pressures closely watched by the Federal Reserve, fell 5.2 percent after declining 6.1 percent in the second quarter. Analysts had expected unit labor costs to fall 4 percent in the third quarter. Compensation per hour rose at a 3.8 percent pace and, adjusted for inflation, was up 0.2 percent.

Compared with the July-September quarter of 2008, non-farm productivity rose at a 4.3 percent rate. Unit labor costs fell 3.6 percent year-on-year.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)

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