Unemployment rates continued to fall in March in many U.S. states, the Labor Department said on Friday, sparking cautious optimism that an economic recovery is dawning.

Five states saw their jobless rates decrease from the year before, and one state had no change, the Labor Department said. In February, four states registered a year-over-year drop.

At the same time, 17 states and the District of Columbia registered rate decreases over the month, and nine states had no monthly change.

Michigan again had the highest unemployment rate but it held steady at 14.1 percent in March versus February.

The overall trend for Michigan's labor market three months into 2010 is a stable jobless rate and moderating job losses, said Rick Waclawek, director of Michigan's Bureau of Labor Market Information and Strategic Initiatives, in a statement.

North Carolina, which had a jobless rate of 11.1 percent in March, down from 11.2 percent in February, gained 3,300 jobs in the month, mostly in leisure and hospitality.

We need to see a more consistent pattern of growth in our job sectors in the coming months before we can be sure this is a sign of sustained growth, said the chairman of the state's employment commission, Lynn Holmes, in a statement.

Many states attributed jobless rate increases to more people looking for work.

According to the Labor Department, nonfarm payroll employment increased in 33 states and the District of Columbia and decreased in 17 states. Maryland had the largest monthly gain of 35,800 jobs, which shows that our economy is beginning to turn in a positive direction, said Governor Martin O'Malley in a statement.

In Illinois, the unemployment rate hit its highest since July 1983, and yet the state also added 3,000 jobs in March, its third consecutive month of growth.

That is creating cautious optimism that the effects of this national recession might be softening, the state's employment director, Maureen O'Donnell, said in a statement.

As jobs are created, people become more encouraged about their ability to find a job and therefore reenter the workforce, she added.

In the same light, Georgia hit a record high jobless rate of 10.6 percent but layoffs in the state are slowing and payrolls grew by 10,500 jobs in March, suggesting that a fledgling recovery may be gaining traction, said State Labor Commissioner Michael Thurmond.

Still, the states slammed by the collapse of the housing market have yet to see health return to their job markets. California, Florida and Nevada all broke past the record highs in their jobless rates set earlier this year.

Not all regions of the country are out of recession yet, but those areas still in decline are doing so more slowly, and recovery is evident across most of the Midwest, Gulf Coast and Southeast, said Moody's Economy.com Managing Director Steven Cochrane this week.

Cochrane attributed the slow turnarounds to stability in the health and education sectors and growth in manufacturing.

(Additional reporting by Michael Connor in Miami and Karen Pierog in Chicago; Editing by James Dalgleish)

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