U.S. private companies hemorrhaged nearly 700,000 jobs in February and the service sector slump deepened as the year-old recession showed little sign of abating, according to data released on Wednesday.

The private sector cut 697,000 jobs versus 614,000 in January, according to an ADP Employer Services report that suggested hefty employment declines are on the way in the government's more comprehensive payrolls data on Friday.

The service sector's decline accelerated in February, according to the Institute for Supply Management, whose employment gauge also remained at a depressed level despite its improvement from the previous month.

This is a slow U-shape recession, said Kurt Karl, chief U.S. economist at Swiss Re in New York. We are still sinking. There is no sign of a bottom.

On aggregate, the services sector is more pessimistic going forward and it is contracting a bit faster. It's going in the wrong direction.

The service sector represents about 80 percent of U.S. economic activity.

It often resists the grip of recession longer than other areas, but in February, accounted for more than half of the total private sector job losses reported by ADP, reflecting the rapid deterioration of the economy in recent months.

With financial markets now accustomed to dreadful economic data, stocks initially edged higher after the ISM services sector report, but quickly lost the momentum.

Government bonds, which usually perform better during times of economic weakness, initially added to their losses but then pared those back a bit.

NONE ESCAPE THE SWORD

The Institute for Supply Management said its non-manufacturing index -- which gauges the service sector -- came in at 41.6 in February versus 42.9 in January.

The level of 50 separates expansion from contraction in the index, which dates back to July 1997. Economists had expected a reading of 41.0.

Worryingly, the ISM's prices paid index rose, though remained contractionary, at 48.1 in February versus 42.5 in January.

Further rises without signs of economic improvement could spur worries that the U.S. is entering a stagflationary period of weak economic activity and rising prices.

The ISM's employment index rose but remained highly contractionary at 37.3 in February versus 34.4 in January.

None really escaped the sword here, Joel Prakken, chairman of Macroeconomic Advisers, whose firm jointly developed the ADP report, said about the service sector.

Economists had expected 610,000 private-sector job cuts in February.

MORE COMPREHENSIVE

Economists expect Friday's payrolls report, which gives a more comprehensive picture of the labor market, to show the economy shed 648,000 jobs in February and the unemployment rate rose to 7.9 percent from 7.6 percent.

The U.S. jobless rate is likely to push well above 8 percent by mid-2010 and may even top 9 percent, Prakken said.

Prakken added that the unemployment rate would top 10 percent without the government's economic stimulus plan.

Prakken also told a teleconference of journalists that he expected the U.S. economy to lose 3 million jobs this year.

He said he expected the economy's contraction in the first quarter to be similar to the drop in gross domestic product seen in the fourth quarter, when the economy shrank at its fastest annual rate since 1982.

In one slight bit of good news, planned layoffs at U.S. firms fell 23 percent in February from January's seven-year peak, a separate report showed.

Still, the layoffs remained well above long term averages as the protracted U.S. recession took a heavy toll on jobs.

Employers announced plans to cut 186,350 jobs in February, led by the auto industry, down from 241,749 in January, amid an economic slump that is on track to be the most protracted since World War Two, outplacement company Challenger, Gray & Christmas said in its monthly report.

(Additional reporting by Richard Leong and John Parry, Editing by Walker Simon)

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