U.S. employers cut 159,000 jobs last month, a ninth straight monthly reduction and the deepest in 5-1/2 years, the government said in a report on Friday that suggested the economy may be in recession.

The unemployment rate held at a five-year high of 6.1 percent, as 121,000 people left the workforce, the Labor Department reported.

The bad news on hiring, together with a separate report showing that a sluggish service sector barely grew in September, underlined the weakening pace of U.S. economic activity as a credit crunch continues to deepen.

"This is one more stark reminder that this is a time for action, a time for bipartisanship," Commerce Secretary Carlos Gutierrez said in an interview during which he expressed hope the U.S. House of Representatives would vote to approve a rescue package for U.S. financial firms.

"We need that to restore confidence," he said.

RECOVERY TO BE SLOW

White House spokesman Tony Fratto said the job report was disappointing but not surprising. "Everyone should understand that it will take some time for our economy to recover from the housing correction, elevated energy prices and the credit crisis."

September's job losses were much more severe than predicted by Wall Street economists surveyed by Reuters, who had forecast 100,000 jobs would be cut.

Separately, the Institute for Supply Management said its index of non-manufacturing activity eased slightly to 50.2 in September from 50.6 in August. A reading over 50 implies growth, so last month's soft reading showed the sector was virtually stalled.

Some analysts said the economy may be headed into a potentially severe slump, especially with a total of 760,000 jobs having disappeared so far this year.

"We've seen weaker data in history, but these look pretty decisively to be the beginning of something worse," said Pierre Ellis, senior economist with Decision Economics Inc in New York, adding it might make the Federal Reserve more inclined to cut interest rates despite its concern over inflation.

Roger Kubarych, chief U.S. economist for UniCredit Global research in New York, said he felt that Fed action was vital.

LOOKING TO THE FED

"As a result of a series of ugly economic reports and a worrying widening of the financial crisis, we conclude that the Federal Reserve will move quickly to buttress the emergency financial assistance program with a reduction of the federal funds rate by 50 basis points to 1-1/2 percent this month," Kubarych said.

The Fed's policy-setting Federal Open Market Committee is next scheduled to meet October 28-29 but there has been speculation that central bankers could coordinate a global rate cut if financial markets continue to be wracked by turmoil.

U.S. stock prices were solidly higher in late morning, but it was in anticipation that House members will vote in favor of a financial rescue package. U.S. government debt prices were lower while the dollar was little changed against the euro.

The job cuts in September follow revised losses of 73,000 jobs in August and 67,000 in July and show the decline in employment is accelerating. Some 51,000 manufacturing jobs were lost last month on top of 56,000 cut in August, the 27th straight month in which manufacturers slashed their payrolls.

Job cuts were nearly across the board in September in every major category with the exception of government, which added 9,000 jobs.

The average work week in manufacturing industries was the lowest in three years at 40.7 hours.

Overall hours of work in all industries slipped to 33.6 a week in September from 33.7 in August -- the lowest since November 2004.

Hurricane Ike, which hit the Gulf coast, and a strike at aircraft maker Boeing Co. did not impact the data because the employees affected were on payrolls for at least part of the Labor Department's survey period.

(Reporting by Glenn Somerville, editing by Andrea Ricci)