Job creation in the US stalled last month, confounding market expectations and intensifying worries over the strength of the economic recovery.

Employers added only 32,000 net new jobs in July, far below consensus forecasts of 230,000. The US Department of Labor also revised down its June reading from 112,000 to 78,000.

A sharp market reaction suggested that, while the Federal Reserve is still expected to raise US interest rates by a quarter-point to 1.5 per cent on Tuesday, investors now believe the Fed will not act again in September.

The weak employment growth gave fresh impetus to attacks by Mr John Kerry, the Democratic presidential candidate, on President Bush's handling of the economy.

Coming on top of climbing oil prices and weak consumer spending, the jobs data called into question the Fed's view that the economy's recent "softness"would "prove short-lived".

The July data have been generally stronger and consumer confidence remains high, but analysts point to the employment report as the most reliable indicator of the strength of the economy.

"The employment data are weak for the second month in a row," said Mr Richard Berner, chief US economist at Morgan Stanley. "While we believe the fundamentals support the case for stronger growth in the second half of the year, this is a challenge to that view. When [Federal Reserve chairman Mr Alan] Greenspan made his statement on the soft patch being temporary I think he had in mind that there would be some decline in energy prices."

Crude oil prices reached new highs this week, which traders say is the result of strong global demand and concerns about Middle East security and Russian oil production. Oil prices hit record highs yesterday, climbing close to $45 (€36.60) after a renewed threat to Russian oil major Yukos added to the strain on world supplies.

US light crude struck $44.77 a barrel, the highest level in the 21-year history of crude futures on the New York Mercantile Exchange, before easing back to settle at $43.95, down 46 cents from Thursday's settlement.

London's Brent crude hit $41.50 a barrel, a record for the contract since it started trading in 1988, but eased below $41 in later trading.

The latest in a string of rallies this week gathered strength after a financial source said Yukos had no money in its bank accounts after bailiffs seized a total of $900 million to put towards payment of the firms huge back tax bill.

Shares prices were hit by the combination of the poor jobs report and fears over the impact of oil prices.

In New York the Dow Jones Index of leading shares lost 1.5 per cent, while the technology-dominated Nasdaq shed a hefty 2.5 per cent. In London, the FTSE 100 index eased 1.71 per cent to 4,337.9, its biggest one-day fall in three months.

The FTSE Eurotop 300 index of Europe's largest companies fell 2.2 per cent to 955.46.

In the US economists say a stronger labour market and income growth are required to support consumer spending as the impetus from tax cuts and mortgage refinancing fades.

The unemployment rate fell from 5.6 per cent to 5.5 per cent last month, the labour department reported. Payroll employment, which has ranged from last month's low to readings above 300,000 in March and April, has averaged close to 180,000 a month this year.

That is not enough to keep pace with population growth and to absorb workers who return to the labour market.