U.S. private employers unexpectedly shed jobs in March, dampening hopes about the strength of the recovery two days before the government employment report.

In addition, U.S. Midwest business activity expanded less than expected in March while a gauge of New York City business conditions fell, separate reports showed on Wednesday.

U.S. private employers cut 23,000 jobs in March, missing expectations for an increase in jobs although fewer than the adjusted 24,000 jobs lost in February, according to the data by a private employment service.

It throws a little cold water on the idea we were going to be adding jobs in March, which is a little disappointing, people thought finally this might be the month, said John Canally, investment strategist and economist for LPL Financial in Boston.

A forecast of 20 most-accurate economists polled by Reuters calls for job gains of 200,000 in Friday's report.

Job creation is considered key to increasing consumer spending, and to keeping the economic recovery alive. In further evidence of spending weakness, drug store chain Rite Aid Corp forecast a wider-than-expected fiscal year loss.

A March payrolls rise would mark just the second time jobs have increased since December 2007, when the recession started.

The median of estimates from 35 economists surveyed by Reuters for the ADP Employer Services report, jointly developed with Macroeconomic Advisers LLC, was for a rise of 40,000 private-sector jobs this month.

U.S. stocks were nearly flat following the ADP data, while the dollar fell against the euro and U.S. government debt prices rose.

Markets will be closed for the Good Friday holiday when the non-farm payrolls report comes out.

The Institute for Supply Management-Chicago business barometer slipped to 58.8 in March from 62.6 in February. Economists forecast the index at 61. A reading above 50 indicates expansion in the regional economy.

The drop reflected a slowdown in production and a slowdown in new orders, said Chris Low, chief economist, FTN Financial in New York.

Meanwhile, the ISM-New York's seasonally adjusted index of current business conditions fell to 60.6 in March from a revised 78.1 in February. The 50 level separates growth from contraction.

On Thursday, ISM data is expected to show the U.S. manufacturing sector expanded in March for an eighth straight month, while ISM's report on Monday is forecast to show the vast services sector likely also grew.

In a slightly more upbeat report, the Commerce Department said new orders received by U.S. factories rose for the sixth straight month in February. The number was slightly more than expected.

Other economic data showed U.S. mortgage applications rose in the latest week for the first time in three weeks as demand for home purchase loans reached the highest level since October.

The stronger data underscores what officials have been saying about the recovery. Late on Tuesday, Dallas Federal Reserve Bank President Richard Fisher said the U.S. economic recovery is gathering speed as business activity picks up pace.

(Additional reporting by Leah Schnurr, Emily Flitter and Lucia Mutikani, Editing by Chizu Nomiyama)

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