Jobs decline, raising fears of recession - The dismal August payroll figures surprise economists and wallop stocks. Democrats call for a Fed rate cut.

The news, which sent stock prices tumbling, came as two big mortgage lenders based in Southern California -- Countrywide Financial Corp. and IndyMac Bancorp Inc. -- said they planned to cut as many as 13,000 jobs.

The national job losses, which came as a surprise to economists, further boosted speculation that the Federal Reserve would cut interest rates to stave off an economic contraction.

Job rolls shrank by 4,000 -- their first outright decline since 2003 -- as manufacturing, construction and even school employment fell, leaving only healthcare and food services as major growth industries, the Labor Department reported.

The drop in payrolls was especially disturbing because economists on average had expected an increase of more than 100,000 positions and most of the job losses occurred before the worst of last month's financial turmoil.

"It was a lousy report," said Nigel Gault, chief U.S. economist at Global Insight, a forecasting firm in Lexington, Mass. "The news was bad everywhere you look."

"It's going to force people in Washington to ask, 'Outside our models, what's really going on out there?' " said John Silvia, chief economist at banking giant Wachovia Corp. "And what's going on doesn't look good."

The August decline was accompanied by an 81,000-job downward revision in employment growth for June and July, suggesting that the economy had been weaker than previously thought for longer than previously thought.

The dismal data slammed stocks in the U.S. and Europe. The Dow Jones industrial average fell 249.97 points, or 1.9%, to close at 13,113.38.

Part of what made the report particularly unnerving was that Federal Reserve officials, including Chairman Ben S. Bernanke, had said the country's financial problems, which began this summer in the sub-prime mortgage market, were largely confined to Wall Street and that the broader economy, though not robust, remained substantially unaffected.

"First, Bernanke said the sub-prime problem was going to remain sub-prime. Then . . . he said it was going to remain in the credit markets," said David M. Jones, a Denver economic consultant and longtime Fed watcher. "Now you're seeing that the credit crisis has spread to Main Street."