U.S. employers cut 345,000 jobs last month, the fewest since September and far less than forecast, according to a government report on Friday that was the most definitive evidence the economy's severe weakness was diminishing.

However, the Labor Department said the unemployment rate raced to 9.4 percent, the highest since a matching rate in July 1983, from 8.9 percent in April. This reading beat the peak in the jobless rate during the 1973-1975 recession that lasted 16 months.

But it was both a surge in new labor force entrants and a drop in employment that pushed the jobless rate up a half-percentage point. The May report showed a jump of 350,00 in the labor force. In April, the increase was just 120,000.

March and April's job losses were revised down to show smaller declines of 652,000 and 504,000, respectively, meaning 82,000 fewer jobs were lost in those months than previously reported.

Analysts polled by Reuters had forecast non-farm payrolls dropping 520,000 in May. The unemployment rate had been forecast to rise to 9.2 percent.

U.S. stock indexes jumped on the data, while Treasury debt prices fell sharply. The U.S. dollar fell versus the euro, but rose against the yen.

Good news at last. At some point we had to start moving to the 300,000 range. After all, we already laid off an incredible amount of people, said Kurt Karl, chief U.S. economist at Swiss Re in New York.

So this reading is probably not an outlier, we are likely to keep improving on that front until the end of the year.

GROWING OPTIMISM

May's payrolls report supported recent surveys and the decline in new applications for unemployment benefits, that appeared to support perceptions the rate of layoffs was decelerating.

A string of recent data -- from gains in home sales to rising consumer confidence -- have supported growing optimism that economic growth would resume in the second half of the year.

While the job losses in May were spread across almost all sectors, the pace of layoffs was slower than in prior months.

Payrolls in construction industries fell 59,000 after dropping 108,000 in April, likely as a result of the government's historic $787 billion stimulus package.

The service-providing industry shed 120,000 positions after eliminating 230,000 in April. The manufacturing sector purged 156,000 jobs in May, likely reflecting auto plant shutdowns in the wake of Chrysler's bankruptcy filing. The sector shed 154,000 in April.

Education and health services sector payrolls expanded by 44,000 after increasing 13,000 the prior month. The leisure and hospitality industry added 3,000 jobs after consistently shrinking payrolls.

Government, which in April added 92,000 jobs, mostly related to preparations for the 2010 census, cut 7,000 positions in May.

Since the start of the recession in December 2007, the economy has lost 6.0 million jobs, the department said.

The length of the average work week eased to 33.1 hours in May from 33.2 hours in April. Average hourly earnings climbed to $18.54 from $ 18.52 in April.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

Unemployment