World Stocks Drop as US Jobless Rate Hits 7.2 Pct

Traders gather at the post that handles Wal-Mart on the floor of the New York Stock Exchange Thursday, Jan. 8, 2009 (AP Photo/Richard Drew)

(AP)

Stock markets dropped Friday as investors fretted over the outlook for the U.S. economy after an unexpectedly large increase in the unemployment rate and confirmation that more jobs were lost in 2008 than in any year since World War Two.

An early relief rally following the news that payrolls in the world's largest economy declined by a smaller than anticipated 524,000 in December soon dissipated as investors focused on the rise in the unemployment rate to a 16-year high of 7.2 percent from 6.8 percent in the previous month. Analysts had expected unemployment to hit 7 percent in December.

Investors were also spooked by the news that for all of 2008, the U.S. economy shed 2.6 million jobs — the most since 1945 when nearly 2.8 million were lost — even though the number of jobs in the U.S. has more than tripled since then.

"In the end, the decline in non-farm payrolls last month wasn't quite as bad as some in the markets had begun to fear," said Paul Ashworth, senior U.S. economist at Capital Economics.

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"However, it was bad enough and, arguably more importantly, revisions to the declines in earlier months mean that the three-month average decline in payrolls still reached a 50-year record of more than 500,000," he added.

After briefly moving into positive territory following the release, the FTSE 100 index of leading British shares closed down 56.83 points, or 1.3 percent, at 4,448.54, while Germany's DAX fell 96.02 points, or 2.0 percent, to 4,783.89. France's CAC-40 was 24.83, or 0.8 percent, lower at 3,299.50.

On Wall Street, the Dow Jones industrial average was 109.75 points, or 1.3 percent, lower at 8,632.71, while the broader Standard & Poor's 500 index was down 15.59 points, or 1.7 percent, at 894.14.

Equity markets, which enjoyed a rally at the end of 2008 on hopes that fiscal and monetary stimulus measures would help the global economy recover later this year, have been on the retreat in the last few days amid fears about the scale of the recession in the U.S., where a raft of retailers reported dismal sales figures for December.