By Lucia Mutikani

WASHINGTON (Reuters) – U.S. employers unexpectedly cut 85,000 jobs in December, cooling optimism on the labor market’s recovery and keeping pressure on President Barack Obama to find ways to spur job growth.

The Labor Department said on Friday that November payrolls were revised to show the economy actually added 4,000 jobs rather than losing 11,000 as initially reported, breaking a streak of consecutive losses that dates back to December 2007.

With revisions to October, however, the economy lost 1,000 more jobs than previously estimated over the two months.

The unemployment rate was unchanged at 10 percent in December, but that reflected a surprisingly large number of people leaving the labor force.

Analysts polled by Reuters had expected nonfarm payrolls to hold steady last month, with the jobless rate edging up to 10.1 percent.

“The economy continues to take three steps forward and two steps back. I wouldn’t read too much into it beyond the fact that this will be a slow employment recovery. Directionally, the economy is on a mend,” said David Katz, chief investment officer at Matrix Asset Advisors in New York.

U.S. stock opened marginally lower, while the dollar fell against the euro and government bond prices erased losses as the report dashed hopes among some that the economy was now generating jobs.

U.S. short-term interest rate futures pared losses as investors bet that the weak labor market would keep inflation tame and encourage the Federal Reserve to leave interest rates near zero for a long time.

Euro-zone unemployment jumped to an 11-year high in November, and is likely to rise more in the coming year.

“The American economy is clearly not going to burst out of the gate with growth and job creation but it will perform better than its major competitors in Europe and Japan,” said Joseph Trevisani, chief market analyst at FX Solutions in Ridgewood, New Jersey.

POLITICAL PRESSURES MOUNTS

High unemployment is one of the toughest domestic challenges facing Obama. The administration’s success in getting people back to work will shape prospects for Obama’s political future.

Obama’s popularity has steadily fallen, knocking his approval ratings down to around 50 percent. This could dim the election prospects for his Democratic Party in the November congressional elections. Obama is scheduled to make a statement on the economy at 2:40 p.m. EST.

“We’re going to have to work harder to create more jobs,” U.S. Labor Secretary Hilda Solis told Bloomberg TV. “The president will outline more tax credits for small business because they are the engine of growth.”

Unemployment remains the Achilles heel of the economic recovery, which started in the third quarter of 2009 following the worst recession in 70 years. Creating jobs is critical to sustaining the economic recovery when government stimulus fades.

For the whole of 2009, the economy shed 4.2 million jobs, according to the Labor Department’s survey of employers.

The department’s survey of households offered an even gloomier assessment of the job market, showing that 661,000 people left the work force last month.

The report showed there were 929,000 “discouraged workers” who had given up looking for a job, up from 642,000 a year earlier. Chris Rupkey, an economist with Bank of Tokyo-Mitsubishi, called the rise in discouraged workers “a simply astonishing number that borders on the frightening.”

“If they were still looking for work and counted as the unemployed, the unemployment rate would have been 10.5 percent,” he said. “This clearly isn’t your father’s recession. It is looking more like your great-grandfathers. Brother, can you spare a dime?”

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