U.S. employers cut fewer jobs than expected during snow-battered February and the unemployment rate held steady at 9.7 percent, bolstering views the economy was on the brink of creating jobs.

President Barack Obama, whose approval ratings have dropped partly because of high unemployment, said the figures showed measures his administration took to boost the economy were working but that unemployment was still too high.

Nonfarm payrolls fell 36,000, the Labor Department said on Friday, adding it was unclear how the severe snowstorms that hit much of the country last month had affected employment.

Financial markets had expected payrolls to drop 50,000 in February and the unemployment rate to edge up to 9.8 percent.

If we did not have bad weather, then this number would have been solidly positive. It tells me the economy and the jobs market have evolved to the point where we are now ready to produce jobs, said Phil Orlando, chief equity market strategist at Federated Investors in New York.

Not only were February's job losses lighter than had been expected, layoffs in the prior two months were 35,000 less than previously reported.

Stocks rallied as the data allayed fears of a labor market setback that had been fanned by a string of reports showing an increase in new claims for jobless benefits. Both the Dow Jones industrial and the Standard & Poor's 500 index closed at their highest levels in six weeks.

Prices for U.S. government debt tumbled, while the dollar soared versus the yen.

In the wake of the report, U.S. short-term interest rates showed investors thought the Federal Reserve, which has vowed to keep borrowing costs ultra low for an extended period, could raise its benchmark rate from its current zero to 0.25 percent range by November.

The emergency interest rate level is no longer warranted either for the markets or the economy, said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi in New York. He said he expects the Fed to drop its low-rate promise at its next meeting on March 16.

Most big banks that do business with the U.S. central bank believe it will raise the benchmark rate this year and the unemployment rate has already peaked, a Reuters poll showed.

BAD WEATHER A FACTOR

Since the economy fell into recession in December 2007, 8.4 million jobs have been lost. Job growth is crucial to sustain the recovery, which started in the second half of last year.

Confidence in the labor market's prospects is starting to filter through to households. Consumer credit increased in January for the first time in a year.

Obama and fellow Democrats worry voter anger could cost them in November congressional elections if progress is not made in putting Americans back to work.

I'm not going to rest, and my administration is not going to rest, in our efforts to help people who are looking to find a job, Obama said on Friday.

According to the Labor Department, bad weather kept about 1.03 million workers home at some point last month compared to only 259,000 in January. This was the highest since January 1996, when the country was also slammed by blizzards.

While the winter storms might have affected its employment count, it was difficult to quantify the impact, the Labor Department said.

Not every business closure or temporary worker absence causes a drop in employment, because workers are counted as employed if they received any pay during the survey period for the department's job count, even if for just an hour.

Moreover, it was unclear how many workers may have been added to payrolls in February for snow removal or repairs related to the storms, it said.

Still, economists drawing parallels with the events in 1996 expect a big jump in March payrolls. Payrolls in January 1996 fell by 19,000 and rebounded by 434,000 in February.

The weather effects last month were likely felt in the construction sector, where employment fell by 64,000 jobs after declining by 77,000 in January. Manufacturing jobs increased 1,000, less than the 20,000 gained in January.

Temporary hiring, seen as a precursor to increases in payroll employment, increased 48,000 last month. Employers have added temporary help for five straight months after nearly two years of monthly declines.

Half of the job losses last month came from government workers, but that category is expected to see huge gains in the coming months as more workers are hired for the once-a-decade U.S. census. In February, 15,000 temporary census workers were hired.

While the labor market is gradually improving, obstacles still remain. A broad measure of unemployment that includes the number of workers marginally attached to the labor force and those working part time for economic reasons rose to 16.8 percent from January's 16.5 percent.

About four in 10 unemployed workers in February had been out of a job for 27 weeks or more.

It is entirely probable that the unemployment rate will move higher later this year as confidence in a modest recovery takes hold and individuals look to find employment, said Joseph Brusuelas, head of Brusuelas Analytics in Stamford, Connecticut.

(Additional reporting by Glenn Somerville and Jeff Mason; Editing by Andrew Hay)