U.S. job growth accelerated more than expected in July, tamping down fears the economy was sliding into a fresh recession and easing pressure on the Federal Reserve to provide more support for the weak economy.

Nonfarm payrolls increased 117,000 after slowing abruptly in the past two months, Labor Department data showed on Friday. The rise beat economists' expectations for an 85,000 gain.

The unemployment rate dipped to 9.1 percent from June's 9.2 percent, but that was because discouraged job-seekers gave up the search for work. Still, the report was heartening after a rush of disappointing data over the past week.

This shows that the U.S. economy is not dead yet. We have potential to get back on track with moderate growth to a strong recovery next year, said Kurt Karl, head of economic research and consulting at Swiss Re in New York.

Average hourly earnings rose 10 cents, the largest increase since November 2008 and good news for spending. Over the past year, earnings are up 2.3 percent, the biggest 12-month gain since October 2009.

The tenor of the report was also helped by revisions showing 56,000 more jobs were added in May and June than first thought.

A separate report showed consumer credit rose $15.5 billion in June, the biggest gain since August 2007 and another hopeful sign for the economy.

But the jobs data showed the labor market still has a steep climb to regain health. The economy needs to create at least 150,000 jobs a month to keep the unemployment rate from rising further, and only two million of the 8.7 million jobs that were lost during the recession have been recovered.

President Barack Obama on Friday renewed a call for an extension of a payroll tax cut and emergency unemployment benefits to help support the economy. Republican opponents offered a prescription of budget cuts and easier regulation.

High oil and food prices and supply chain disruptions following a major earthquake and tsunami in Japan in March knocked the recovery off course in the first half of year and left the economy vulnerable to recession just two years after the worst downturn since the 1930s ended.

Some economists have put the chances of a new slump as high as 40 percent.

The data failed to halt a rout in global stocks that has stretched for eight days on U.S. recession fears and Europe's inability to tame its spreading debt crisis. Investors are worried policymakers are running out of bullets

U.S. stocks opened higher but see-sawed sharply, with major indexes down as much as 2 percent at times. Stocks closed mixed, with the Dow industrials up half a percent, the Nasdaq down 0.9 percent and the Standard & Poor's 500 index down a fraction.

The dollar weakened broadly as investors showed a little more appetite for risk-taking. But gold prices rose in a sign risk-aversion had far from fully dissipated.

UGLY DEBT FIGHT

The private sector accounted for all the jobs created in July, with business payrolls rising 154,000 -- an acceleration from June's 80,000 increase. Government payrolls dropped 37,000, a ninth straight monthly decline.

While private employers showed a renewed appetite to hire last month, there are worries their enthusiasm might have been dampened by the ugly fight between Democrats and Republicans in Congress during talks to raise the country's debt limit, which came to a head in late July and early August.

The fight over the debt ceiling created a new climate filled with uncertainty and anxiety that will cause businesses to ... either reduce hiring, freeze hiring, or cut payrolls, said Tony Crescenzi, portfolio manager at PIMCO in Newport Beach, California.

The poor economy has dented Obama's popularity and ensures he will face a tough bid for reelection next year. The president pressed lawmakers to act swiftly to spur the recovery when they return from a summer break in September.

There is no contradiction between us taking some steps to put people to work right now and getting our long-term fiscal house in order, Obama told veterans in Washington. The more we grow, the easier it's doing to be to reduce our deficit.

The nation's borrowing limit was raised this week in a deal that relied on spending cuts, fueling concern the economy could weaken further. The spending pull-back and scheduled expiration of the payroll tax cut and emergency jobless aid could reduce gross domestic product growth by more than a percentage point next year, analysts say.

EYES ON THE FED

The fiscal tightening comes at a time when the Federal Reserve has a limited arsenal to defend the economy.

The Fed, the U.S. central bank, has cut interest rates to near zero and spent $2.3 trillion on buying bonds to try to spur the economy by keeping interest rates low.

Fed policymakers, who meet on Tuesday, have said they want to see how the economy fares before taking any further action, and the data fit with their forecasts for a pickup in growth.

Goldman Sachs on Friday lowered its third-quarter GDP growth estimate to a 2.0 percent annual rate from 2.5 percent, but even that would mark a step up from a tepid second quarter. Many other analysts have trimmed forecasts this week as well.

With the exception of government, job gains were spread across the board last month. Factory payrolls rose 24,000 after climbing 11,000 in June, with most of the gains in the auto sector. Construction added 8,000 jobs after dropping 5,000.

The drop in government jobs was almost entirely due to a government shutdown in Minnesota. Still, about half a million government jobs have been lost over the past two years as state and local governments have tightened their belts.

The public sector job cutbacks are a real drag on growth and the debt ceiling agreement makes it clear that belt tightening will continue to restrain activity for a long time, said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

(Additional reporting by Donna Smith and Jeff Mason in Washington; Editing by Andrea Ricci and James Dalgleish)