U.S. non-farm payroll jobs likely fell by their smallest amount in seven months in May, pointing to a slackening of the recession, but the unemployment

rate looks set to climb to its highest in nearly 26 years, a Reuters poll showed.

The survey of 79 economists forecast employers cut 520,000 jobs last month after reducing payrolls by 539,000 in April, which was the smallest number of jobs cut since October.

The economists expect the unemployment rate to rise to 9.2 percent in May, the highest since September 1983, from 8.9 percent in April. The Labor Department will release the employment report at 8:30 a.m. on Friday.

It's still a very weak labor market out there. Businesses are reluctant to hire and continue to lay people off to control costs and bring their inventories down, said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh.

Analysts reckon non-farm job losses bottomed in January, with the loss of 741,000 jobs.

But with the number of people continuing on benefits after an initial week of aid at record highs throughout April and May, the unemployment rate is predicted to have risen further.

The U.S. economy's housing-led downturn, now in its 18th month, has been brutal on the labor market. As of April, 5.7 million jobs had been lost since the recession began in December 2007.

Analysts expect the construction sector, worst hit by the downturn, to show a sharp moderation in the pace of job loss, helped both by warmer weather and the disbursement of some of the government's $787 billion in stimulus money.

May's nonfarm payrolls report could capture some of the job losses related to plant closures by automaker Chrysler after it filed for bankruptcy protection to help it reorganize.

With General Motors' also planning to shutter plants as part of its reorganization in bankruptcy, economists expect the auto sector to weigh on the labor market for months.

Even if the recession ends later this year, as widely expected, the unemployment rate will rise well into early 2010.

Given the high unemployment rate, average hourly earnings were seen inching up by only 0.2 percent in May after April's 0.1 percent increase. The average work week was seen holding steady for the third consecutive month at 33.2 hours.

(Editing by Kenneth Barry)