NEW YORK, Jan 5: US stocks plunged on Friday after data showed the weakest job creation since 2003 and a rise in unemployment to a two-year high, fueling recession fears.

The Dow Jones Industrial Average tumbled 256.54 points (1.96 per cent) to close solidly below the psychological 13,000 level at 12,800.18.

The tech-heavy Nasdaq composite shed 98.03 points (3.77 per cent) to 2,504.65 and the broad-market Standard & Poor’s 500 index lost 35.53 points (2.46 per cent) at 1,411.63, according to official final figures.

Investors were rattled after the Labour Department said the US economy gained a mere 18,000 nonfarm jobs in December as the unemployment rate rose to 5.0 percent.

The report shattered market expectations of a 70,000 jobs increase and a 4.8 per cent jobless rate, up from 4.7 per cent in November.

Some analysts said the surprisingly weak report could lead the Federal Reserve to lower interest rates again as early as its January 29-30 meeting, after a combined one percentage point reduction since September.

The sudden jolt on the labor front showed that economic troubles from a prolonged housing slump and related credit tightening are affecting consumers’ potential spending power, which drives roughly two-thirds of US output.

This news will increase concern that the US economy is headed into recession, said Al Goldman, chief market strategist at AG Edwards.

It also increases the odds on more Fed rate cuts but we believe the market would have been much happier to see 80,000 to 100,000 new jobs and less Fed rate cuts than the figures today now indicate.The market also digested a Federal Reserve announcement that it will auction off $60 billion in short-term funds to banks this month in a new vehicle called a term auction facility (TAF), up from $40 billion in December, to help ease a credit squeeze.

While we continue to expect a 25 basis point rate cut at the end of January, the combination of poor payroll data and the increase in the TAF auction sizes suggest that the odds of a 50 basis point rate cut are rising,said Drew Matus of Lehman Brothers.Dick Green of Briefing.com highlighted the stock market’s extreme sensitivity to any signs of economic weakness.

It will take more time for the stock market to believe that the financial problems related to write-downs of mortgage securities are slowly correcting and that the Fed rate cuts started four months ago will provide support to the economy in 2008, Green said.

On Wall Street, nine of the 10 economic sectors ended in the red, except for services.

The grim jobs report pounded the financial sector, which has been hit hard by mortgage-related losses in the housing meltdown.

Bear Stearns plummeted 5.92 per cent to $78.87, Lehman Brothers fell 4.34 per cent to 58.35, JP Morgan Chase lost 2.27 per cent at 40.93 and Citigroup slid 2.39 per cent to 28.24.

Aerospace giant Boeing fell 1.33 per cent to 85.82, despite reporting record orders for commercial aircraft in 2007.

Bond prices advanced as investors sought a safe haven. The yield on the 10-year US Treasury bond fell to 3.854 per cent from 3.901 percent late Thursday and that on the 30-year bond declined to 4.359 per cent from 4.369 per cent. Bond yields and prices move in opposite directions.

Europe’s main stock markets closed sharply lower earlier, reacting to similar worries.

In London the FTSE 100 index lost 2.02 per cent to finish at 6,348.50 points, in Paris the CAC 40 fell 1.79 per cent to 5,446.79 while in Frankfurt the Dax lost 1.26 per cent to end the day at 7,808.69.---AFP