U.S. employment fell for a third straight month in August, but the drop was far less than expected and private hiring surprised on the upside, easing pressure on the Federal Reserve to prop up economic growth.

Nonfarm payrolls fell 54,000, the Labor Department said on Friday, helping assuage fears of a double-dip recession in financial markets that had looked for a drop of 100,000 jobs.

However, the data did little to take the political heat off President Barack Obama over his handling of the economy or improve the Democratic Party's chances in November's mid-term congressional elections.

The recovery may be wobbly but it is still staggering forward, said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. The figures take some of the pressure off the Fed to do something quickly to shore up the recovery, but they won't help the administration as the mid-term elections approach.

While the data tamped down concerns the recovery could stall, a second report showing growth in the dominant services sector hit a seven-month low in August underlined the economy's sub-par performance.

Employment last month was dragged lower as the government let go 114,000 temporary census workers. Private employment, considered a better gauge of labor market health, increased 67,000 after an upwardly revised 107,000 gain in July. Markets had expected a rise of only 41,000 in August.

In addition, the government revised payrolls for June and July to show 123,000 fewer jobs lost than previously reported.

Stocks on Wall Street rose on the data, while prices for safe-haven U.S. government debt fell for a third straight day as traders saw the odds of a contraction in growth lessening. The dollar rallied against the yen and euro.

Concerns of a double-dip recession had already diminished somewhat this week as data showed strength in manufacturing and gains in consumer spending, but the sluggish pace of growth has kept investors on edge.

Last month, the unemployment rate edged up to 9.6 percent from 9.5 percent, in line with expectations, as discouraged workers came back into the labor force to hunt for jobs.

That was seen offering little help to Obama's weakened popularity or to Democrats who risk losing their majorities in the House of Representatives and Senate.

It's bad for Democrats, but it was bad last month and the month before, too, said Linda Fowler, a political scientist at Dartmouth College in New Hampshire said. This (unemployment) number is stubbornly refusing to budge.

CONSUMER SPENDING HURT

Jobs scarcity has hurt consumer spending, which normally accounts for about two-thirds of U.S. economic activity, and left recovery from the worst recession in 70 years sputtering.

Growth slowed markedly in the second quarter this year and Fed Chairman Ben Bernanke said last week the central bank stood ready to take fresh steps to bolster the economy if needed.

Some analysts had expected the Fed to announce the resumption of its bond buying program at its upcoming meeting on September 21, but said they saw no urgency now.

Obama welcomed the report as positive news. But he told reporters more was needed to be done to help the economy. He said he would outline new measures next week.

The economy is moving in a positive direction, jobs are being created -- they're just not being created as fast as they need to given the big hole that we experienced, he said.

Obama's plans could include several targeted initiatives, including extending middle class tax cuts, investing in clean energy, spending more on infrastructure and delivering more tax cuts to businesses to encourage hiring.

The White House cautioned that the measures should not be seen as a second stimulus package. Lawmakers are in no mood to approve a big new spending plan that would add to the deficit.

There is no doubt that trillions of dollars in deficit spending as well as mounting government expansion and an intrusive politicization of our economy are destined to discourage job creation, said Representative Tom Price, a leading House Republican conservative.

Last month, the services sector added 67,000 jobs after July's 70,000 rise. Temporary help services, seen as a harbinger of future permanent hiring, rebounded 16,800 after falling in July for the first time since September.

The loss of census jobs and layoffs at cash-strapped state governments, pushed down federal government payrolls by 121,000 compared to a 161,000 fall in July.

Employment in the goods-producing sector was unchanged last month as a drop in manufacturing offset an increase in construction payrolls, which were boosted by the return of 10,000 striking workers. Manufacturing jobs fell 27,000 after gaining 34,000 in July.

While the average workweek was unchanged at 34.2 hours, earnings increased by 6 cents, which analysts said bodes well for consumer spending. There was also a glimmer of hope for the long-term unemployed. The number of people out of work for 27 weeks and more fell by 323,000 last month to 6.2 million.

(Additional reporting by Steve Holland and John Whitesides; Editing by Tim Ahmann and Andrew Hay)