The pace of U.S. job losses hit a one-year low last month but the unemployment rate jumped to a 26-year high of 9.7 percent, the government said on Friday in a report showing a slowly improving labor market.

The Labor Department said employers cut 216,000 jobs, the smallest since August 2008, and revised job losses for June and July to show 49,000 more jobs lost than previously reported.

Analysts had expected non-farm payrolls to drop 225,000 in August and the unemployment rate to rise to 9.5 percent.

It certainly sustains perceptions that the economy gradually is swinging to recovery. The main pitfall would be continued weak income growth but that was not the case in August, so that's encouraging, said Pierre Ellis, senior economist at Decision Economics in New York.

U.S. stock index futures rose after the jobs data, while the dollar weakened against the euro. U.S. government debt fell on the data.

A gauge of labor market slack that measures the unemployed, people working part-time for economic reasons, and those only marginally attached to the labor force, rose to a record 16.8 percent in August from 16.3 percent in July.

The labor force increased by 73,000 in August, which indicated the return of some jobless workers who had given up looking for work, accounting for part of the rise in the unemployment rate.

Since the start of the recession in December 2007, the economy has shed 6.9 million jobs, the department said. Stubbornly high unemployment is wearing on consumer confidence and crimping domestic demand, pointing to an anemic recovery from the worst slump in 70 years. Consumer spending accounts for over two-thirds of U.S. economic activity.

However, the August report confirmed the pace of layoffs was easing from early this year, when nearly three quarters of a million jobs were lost in January.

Manufacturing employment fell by 63,000, with a total of 2 million factory jobs lost since the start of the recession. Payrolls in construction industries dropped 65,000 after falling 73,000 in July.

The service-providing sector purged 80,000 workers in August, while the goods-producing industries shed 136,000 positions.

Education and health services continued to add jobs, with payrolls increasing 52,000 in August after rising 21,000 in July. Government employment fell 18,000 after slipping 28,000 in July.

The average workweek, which closely correlates with overall output and gives clues on when firms will start hiring, was unchanged at 33.1 hours in August.

Average hourly earnings rose to $18.65 in August, rising for a fourth straight month, reflecting an increase in the legal minimum wage. Earnings were at $18.59 in July.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)