The U.S. economy's recovery may have stalled after data on Wednesday showed half a million private sector jobs were lost in May and mortgage applications fell last week as rising interest rates frightened away buyers.

One ray of hope though came from another report showing planned layoffs at U.S. firms fell for a fourth consecutive month in May, reaching the lowest level in eight months.

The data adds to the policy dilemma facing the Federal Reserve, which has committed trillions of dollars of financial resources to keep interest rates low as it tries to end the worst recession in decades.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended May 29 decreased 16.2 percent to 658.7.

Meanwhile, U.S. companies axed 532,000 jobs last month, more than economists had expected, according to a report by ADP Employer Services.

Worse yet, April's figures were revised to show more cuts than previously estimated, highlighting the ongoing deterioration in an economy that may have difficulty living up to expectations that it will resume growth in the second half of the year.

There is still a lot of weakness in the labor market but I think it is going to be a gradual paring down of job losses as the policy actions gain traction, said Josh Stiles, bond strategist at Ideaglobal in New York.

U.S. stock index futures fell in the wake of the ADP data which raised questions about an equities rally in recent weeks inspired by apparent signs that the recession may be bottoming out.

U.S. government bonds, which generally benefit from signs of economic weakness, added to their gains on Thursday morning, after selling off in recent weeks.

However, a report from Challenger, Gray and Christmas Inc. showed planned layoffs at U.S. firms fell for a fourth month in May, reaching the lowest level in eight months.

This suggested that the job cuts in the pipeline might be decreasing, offsetting some of the gloom from the ADP report, which came ahead of Friday's more comprehensive labor-market data for both the private and public sectors from the U.S. Labor Department.

Planned job cuts announced by U.S. employers totaled 111,182 in May, down 16 percent from the 132,590 layoffs recorded the previous month, according to the global outplacement consultancy Challenger, Gray & Christmas, Inc.

AT THE EPICENTER

Housing was at the epicenter of the financial crisis that led to the current recession and many economists believe house prices must at least stop falling before the economy can begin growing again.

But the fall in mortgage applications last week reflected a plunge in demand for home refinancing loans as interest rates surged to their highest levels since late-January.

Federal officials have been eager to help homeowners refinance out of onerous mortgages written during the boom of the last decade, when credit was cheap and few believed house prices could fall.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.25 percent, up 0.44 percentage point from the previous week, its highest level since the week ended January 30.

It was also significantly higher than the all-time low of 4.61 percent set in the week ended March 27. The survey has been conducted weekly since 1990. Interest rates, however, were well below year-ago levels of 6.17 percent.

Thirty-year mortgage rates had mostly been on a downward trend since the Federal Reserve unveiled its plan to buy mortgage-backed debt in late November.

This is part of its asset purchase program aimed at keeping borrowing costs low throughout the economy. It has also committed to buy up to $300 billion in Treasuries, including a set of purchases scheduled later on Wednesday.

Treasury yields, which are linked to mortgage rates, have risen sharply in recent weeks despite the Fed's buying, and mortgage rates have responded in kind.

(Additional Reporting by Julie Haviv, Richard Leong and Chris Reese)

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