Lucia Mutikani, January 9, 2009,

WASHINGTON (Reuters) – The unemployment rate surged to the highest in nearly 16 years last month as a deepening year-long recession forced companies to axe more than half a million jobs, government data showed on Friday.

The U.S. economy lost an astonishing 1.9 million jobs in the past four months alone, an acceleration in layoffs toward the end of a year that brought the biggest drop in employment in more than a half century.

In all of 2008, 2.6 million people lost their jobs, the largest slump in employment since a 2.75 million drop in 1945--when the troops were released and war production stopped.

The December data pointed to a bleak start for 2009 and increased chances the economic downturn could become the longest since the 1930s.

"This is a very dismal report. This paints a much worse picture in 2008 than we had thought," said Lindsey Piegza, market analyst at FTN Financial in New York. "This is one of the most significant downward quarters for jobs in post World War (Two) history."

The Labor Department said the unemployment rate jumped to 7.2 percent last month, the highest since January 1993, from 6.8 percent in November. The rise was driven by massive layoffs in all major sectors except government, education and health.

In all, employers cut nonfarm payrolls by 524,000 last month. While that was a bit less than analysts had predicted, job loss totals for October and November were revised upward and came in much higher than previously estimated.

U.S. stocks dropped, with the Dow Jones industrial average closing down 1.64 percent as investors fretted corporate profits would suffer with the economy deteriorating sharply.

Lower-risk government bonds drew a safe-haven bid. The U.S. dollar rallied against the euro, amid relief that December's job losses were below market estimates.

The darkening labor market picture underscored the sense of urgency President-elect Barack Obama and lawmakers feel about enacting a huge economic stimulus plan.

"Clearly the situation is dire. It is deteriorating and it demands urgent and immediate action," Obama told a news conference on Friday.

RECESSION DEEPENS

The U.S. economy slipped into recession in December 2007 and the 12-month downward spiral is already the longest since the early 198Os. If it lasts more than 16 months, it will be the longest recession since the Great Depression.

"We expect the jobs hemorrhage to continue through much of 2009," said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts.

"The current pace of job losses means that the unemployment rate will rise into the 9 percent to 9.5 percent range -- at a minimum -- before leveling off."

The collapse of the U.S. housing market triggered the worst financial crisis since the 1930s, and businesses and consumers alike have retrenched, with shock waves spreading worldwide.

December marked the second straight month of U.S. job losses in excess of half a million. The Labor Department said 584,000 jobs were lost in November, the biggest decline since December 1974, when payrolls dropped 602,000.

The November total was previously reported as a loss of 533,000. October's losses were revised upward to 423,000 from 320,000, meaning 154,000 more jobs were shed in those two months than had been thought.

Adding to the weak tone, the length of the average workweek fell to 33.3 hours, the lowest on record since the series started in 1964, suggesting more job cuts could be in store.

More worryingly, the number of people working part-time for economic reasons reached 8 million in December, up from an already high 7.3 million, and the labor underutilization rate, which includes discouraged job seekers, jumped to 13.5 percent from 12.6 percent.

PULLING OUT THE STOPS

U.S. officials have already taken aggressive action to try to quell a financial crisis that long ago spread worldwide, and Obama is pushing for a package of government spending and tax cuts that could total $775 billion or more.

The Federal Reserve -- the U.S. central bank -- has cut benchmark interest rates to virtually zero and pledged to ensure financial markets are flush with cash in the hope that market-set borrowing costs recede and spur economic activity.

The Libor rate, the world's main benchmark for short-term lending, is on a downward trend. Analysts said that will ultimately help lower corporate borrowing costs.

In December, service-providing businesses shed 273,000 jobs, with retail payrolls shrinking by 67,000.

The blood-letting continued in building and manufacturing. Construction employment dropped by 101,000 and factories cut payrolls by 149,000.

"We don't expect the economy to be back on its feet until 2010, which means it's likely to be a long slog for the U.S. labor market," said Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut.

Further highlighting the grim economic picture, a separate government report showed U.S. wholesale inventories fell 0.6 percent in November after declining 1.2 percent in October.

November wholesale sales plunged a record 7.1 percent after falling 4.5 percent in October.