THE US unemployment rate dipped to a six year low of 5.3 percent in June and caused the Dow Jones to plummet 114 points. The average hourly wage also rose nine cents.

The jobless rate fell from 5.6 per cent in May as the economy spawned a surprisingly large number of jobs, mostly in the retail and services sectors, the US government said yesterday.

The key 30 year Treasury bond plummeted two and a half points pushing its yield up to 7.15 per cent from 6.93 per cent on Wednesday.

Wall Street traders were reacting to the belief that a stronger economy would prompt the Federal Reserve to raise interest rates out of fear of higher inflation.

"This is too much growth and too much wage gain for the Federal Reserve to feel comfortable. We're going to have a (credit) tightening one of these days," said Mr Robert Dederick, an economist with Northern Trust.

"I doubt it will be before the next Federal Open Market Committee (FOMC) meeting, but it's looking strong for the next one. The jobless rate (at 5.3 per cent) is probing the outer limits of full employment."

Payrolls of non farm employers brew by 239,000 to 119.5 million last month after jumping by 365,000 in May, the Labour Department said in the government's first reading of the health of the economy in June.

The report reflected a more vibrant economy than had been projected by Wall Street economists, who had expected payrolls to grow by 150,000 and the jobless rate to slip to 5.5 per cent. The 5.3 per cent jobless rate in June was the lowest since June 1990, when it was 5.2 per cent, the department said.

"All those numbers are very, very strong," said Mr Samuel Kahan, president, A.S.K. Financial Research. "The bottom line is it looks like the economy was strong in June and makes it look like there's strong momentum for the third quarter."

The Fed's policy setting FOMC, which decides interest rates, left interest rates unchanged at its meeting this week, next meets on August 20th.

"If the Fed had seen these numbers, they would have tightened," said Mr David Sloan, senior economist at I.D.E.A. Inc. "There's very little doubt that this figure would have justified tightening. The data suggest that the economy has stronger momentum than was realised going into the third quarter."

The latest data are sure to be scrutinised even more closely by the markets, where interest rate anxiety is already beginning to focus on the August 20th meeting of the FOMC.