Private payrolls rose only modestly in June and overall employment fell for the first time this year as thousands of temporary census jobs ended, showing the economic recovery failing to pick up steam.

Although private hiring was well below levels needed to bring down unemployment on a sustained basis, analysts said the report from the Labor Department on Friday was not consistent with an economy on the brink of another recession.

We are still on track for a fairly moderate recovery, said Julia Coronado, an economist at BNP Paribas in New York. There have been some concerns that maybe we are heading for a double-dip. The report eases those concerns in the sense that we are still creating private sector jobs.

Private hiring rose by 83,000 after adding only 33,000 jobs in May. Total nonfarm employment actually dropped 125,000 -- the largest decline since October -- as the government laid off 225,000 temporary census workers.

The unemployment rate fell to 9.5 percent, the lowest level since July 2009, from 9.7 percent in May, but only because a flood of jobless workers gave up their employment search.

President Barack Obama, whose approval ratings have been battered by the weak economy, expressed disappointment in the numbers even though he said they showed the recovery moving forward.

We're not headed there fast enough for a lot of Americans, he said at Andrews Air Force Base in Maryland. We're not headed there fast enough for me, either.

Economists polled by Reuters had expected private employment to grow by 112,000 jobs, although some had scaled back their projections in recent days. The jobless rate was expected to edge up to 9.8 percent.

U.S. stock prices fell for a fifth straight day on the weak report, while prices for government debt, which had soared in recent days, slipped on relief the data was not as bad as some had feared. The U.S. dollar fell broadly.

EUROPEAN DEBT CRISIS BLAMED

Following a raft of weak reports on consumer spending, the housing market and factory activity, investors are increasingly worried the economy could slip back into a recession. The Commerce Department said on Friday that factory orders in May suffered their biggest tumble since March of last year.

Analysts blamed the moderation in the recovery from the longest and deepest recession since the 1930s on the sovereign debt crisis in Europe, which is expected to stunt growth in the region as governments tighten belts to cut budget deficits.

The European debt crisis is having a negative impact on consumer and business confidence, said Chris Rupkey, chief economist at Bank of Tokyo-Mitsubishi UFJ in New York. I don't think the outlook for the second half is that negative, but the jury is out on this until we see next month's jobs report.

A poor labor market in an election year is the worst nightmare for Obama and could cost the Democratic Party dearly in November mid-term elections.

Obama, who has called job creation his No. 1 priority, has tried to put the blame on the policies of the previous administration. But Republicans say a roughly $800 billion package of tax cuts and spending pushed by Obama has not worked.

The writing is on the wall for President Obama's stimulus policies and everyone -- taxpayers, economists, and the rest of the world -- sees it but him, said House Republican Leader John Boehner.

With the economy still in a fragile state, the Federal Reserve is also in a bind. It has held benchmark overnight interest rates close to zero since December 2008 and has pumped more than $1 trillion into the economy.

Fed officials believe a sustainable recovery has taken hold, but are watching cautiously and financial markets do not expect the central bank to raise rates until the middle of next year.

Last month, payrolls in the dominant services sector rose 91,000 after increasing 20,000 in May. Temporary help employment rose 20,500, while retail hiring fell 6,600.

In the goods-producing sector, employment fell by 8,000, pulled down by declines in construction. Home building activity has dropped sharply since late April when a tax credit for homebuyers expired.

Employment in the factory sector, which has led the recovery, rose by just 9,000 after a gain of 32,000 in May. Cash-strapped state and local governments were also a drag on employment last month.

Analysts were disheartened by the shortening of the workweek to 34.1 hours from 34.2 hours in May and a slip in average hourly earnings. Shrinking paychecks could pose a risk to consumer spending.

In June, just over 45 percent of the total 14.6 million people unemployed had been out of work for more than 27 weeks, little changed from May.

(Additional reporting by Mark Felsenthal; Editing by Leslie Adler)

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