Europe business activity falls

CHICAGO/LONDON (Reuters) - Disappointing reports on the job market and service sector in the world's largest economy provided an early test on Friday of the nascent optimism that followed this week's agreement by G20 leaders on a $1.1 trillion (744.3 billion pound) deal to combat the global economic crisis.

A separate report Friday showed that business activity in Europe fell again in March, though the pace of decline slowed as efforts to revive economies seemed to gain some traction.

The reaction on Wall Street was muted. The major U.S. stock indexes, which rallied Tuesday, Wednesday and Thursday on signs of increasing stabilization, were little changed at midday, essentially banking this week's gains.

The U.S. Labour Department said the unemployment rate soared to 8.5 percent in March, the highest since 1983, as employers slashed 663,000 jobs and cut workers' hours to the lowest on record.

The agency also revised its data for January to show job losses of 741,000 that month, the biggest decline since October 1949. Since the start of the recession in December 2007, the U.S. economy has shed 5.1 million jobs -- two-thirds of them in the last five months alone.

Christina Romer, the head of the White House Council of Economic Advisers, called the figures "unquestionably horrible." She told Reuters Television the economy should be growing by the year's end, but that jobs growth would lag.

The numbers were bad -- but not as bad as some Treasury traders had expected. As a result, U.S. Treasury debt prices fell on Friday, sending yields rising for a second week in a row.

"The market is breathing a sigh of relief that it's not worse," Colin Lundgren, head of institutional fixed income at RiverSource Investments in Minneapolis, said of the impact of the jobs report.

Business activity in the U.S. services sector, meanwhile, which accounts for about 80 percent of the nation's economic activity, shrank for a sixth straight month in March, according to the Institute for Supply Management's services index, as spooked consumers cut back on purchases.

In the 16-country euro area, companies also continued to slash jobs to cut costs, driving the Markit Eurozone Composite PMI employment index to a new low of 40.3, down from February's 40.8, a survey showed on Friday.

GLIMMERS OF HOPE IN EUROPE

In Europe, services business expectations jumped sharply to a six-month high in March, Markit's survey found.

France and Italy saw optimism for the year ahead hitting six-month highs while it also picked up to a three-month high in Spain. But German companies remained downbeat on the 12-month outlook, growing more pessimistic.

"Overall, pretty optimistic that the euro area economy's recovery is closer and we can start to argue that the recovery will take place by the beginning of next year," Silvio Peruzzo at RBS said.

European Central Bank Governing Council member Nout Wellink also saw the chance of a pickup next year.

"It is very difficult to forecast the future, but it is not unrealistic to assume that our economies will start to grow, after a difficult 2009, again in 2010," he told Reuters on the sidelines of a meeting of European Union finance ministers.

He also said another cut in interest rates could not be excluded. The ECB cut rates by a smaller-than-expected 25 basis points on Thursday to a new record low.

The leaders of the world's richest and biggest economies, which account for more than 80 percent of world trade, also agreed to tighten rules on tax havens, hedge funds and credit rating agencies.

The measures would raise world output by 4 percent by the end of 2010, they said, although they were hazy on the amount of stimulus spending to date, with estimates ranging between $2 trillion and $5 trillion.

World Trade Organisation head Pascal Lamy welcomed G20 consensus to avoid protectionism and an agreement to support global trade flow.

"It is a very positive response," Lamy said. "Implementation now is something we will be watching."

(Additional reporting by Reuters bureaus around the world; Editing by Brian Moss)