U.S. companies hired far fewer workers than expected in May and output in the manufacturing sector slowed to its lowest level since 2009, adding to concerns that the U.S. recovery is running out of steam.

Economists slashed their forecasts for Friday's payrolls report, considered the best barometer of the world's biggest economy, after private-sector job growth tumbled to just 38,000, its lowest level in eight months.

Wednesday's reports were the latest signals that economic growth remained sluggish in the second quarter after a weak start to 2011.

It fits very neatly in with the puzzle we are putting together that speaks to another soft patch, said Peter Kenny, managing director at Knight Capital in Jersey City, New Jersey.

Factory growth around the world weakened last month, surveys from Europe to Asia showed, raising concerns that important export markets for U.S. companies are drying up.

The worse-than-expected slowdown could prompt the Federal Reserve to stick with its super-easy monetary policies for longer than previously thought.

It also fueled questions about whether the central bank might take the controversial step of embarking on a third round of bond-buying to help prop up the economy.

The Fed's current program of bond-buying, known as QE2, is set to expire at the end of June. Some investors worry about whether the economy is strong enough to grow without it.

The end of QE2 will be to the U.S. economy what a lawnmower is to green shoots, said Douglas Borthwick, managing director at Faros Trading in Stamford, Connecticut.

The data inflicted the worst session on Wall Street since August as the Dow Jones industrial average fell 2.2 percent. The dollar hit an all-time low against the Swiss franc but rose against the euro as the euro zone debt crisis deepened.

The yield on 10-year Treasury bonds broke below 3 percent to hit a fresh six-month low.

The ADP report showed private payrolls fell from a downwardly revised 177,000 in April, well short of expectations for 175,000. It was the lowest level since September 2010.

Goldman Sachs and other banks promptly cut their estimates for Friday's non-farm payrolls figure for May.

A new Reuters poll forecast payrolls will rise by 150,000 in May, smaller than a previous 180,000 forecast.

JP Morgan cut its estimate for U.S. economic growth in the second quarter for the second time in recent days, lowering it to 2.0 percent. Even with this revision we'd assess the risks as still a little to the downside, it said in a note.

MANUFACTURING EXPANSION SLOWS

The Institute for Supply Management (ISM) said its index of national factory activity fell to 53.5 in May from 60.4 the month before, missing economists' expectations for 57.7.

New orders, an important gauge of demand ahead, fell to 51.0 from 61.7, the lowest since June 2009.

Companies are managing inventories carefully according to consumer demand, and there did not appear to be a particular impact from supply chain disruptions after Japan's massive earthquake in March, said Bradley Holcomb, chair of the ISM Manufacturing Business Committee in Dallas, Texas.

Manufacturing led the economy out of recession, helped by strength in demand from fast-growing emerging markets, but countries like China and India are now trying to curb their acceleration. The export gauge of ISM fell to 55.0 from 62.0.

Also on Wednesday, General Motors Co and Ford Motor Co reported slightly lower U.S. vehicle sales in May as economic weakness and higher vehicle prices prompted consumers to delay major car purchases.

A separate snapshot of the jobs market showed the number of planned layoffs at U.S. firms rose modestly in May with the government and non-profit sectors making up a large portion of the cuts.

In a silver lining, borrowing by small U.S. businesses surged in April, data released by PayNet Inc showed. Small and medium-sized businesses are key to new hiring.

(Additional reporting by Ellen Freilich and Chuck Mikolajczak; Editing by Padraic Cassidy and Diane Craft)

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