U.S. unemployment rate hits 5-year low, eyes on the Fed

* Nonfarm payrolls rise by 203,000 in November

* Report's strength could lead Fed to taper bond buys

* Jobless rate falls to 7.0 percent from 7.3 percent

* Average hourly earnings, workweek increase

* Inflation pressures remain muted

By Lucia Mutikani

WASHINGTON, Dec 6 (Reuters) - U.S. employers hired more

workers than expected in November and the jobless rate hit a

five-year low of 7.0 percent, raising chances the Federal

Reserve could start ratcheting back its bond-buying stimulus as

soon as this month.

Nonfarm payrolls increased by 203,000 jobs last month,

following a similarly robust rise in October, the Labor

Department said on Friday. The report, which showed broad gains

in employment and a rise in hourly earnings, suggested strength

in the economy heading into year-end.

"It will add further confidence to the Fed of a reduced need

for monetary stimulus in the U.S economy. We now see the bias

shifting in favor of a January tapering announcement," said

Millan Mulraine, senior economist at TD Securities in New York.

The unemployment rate dropped three tenths of a percentage

point to its lowest level since November 2008 as some federal

employees who were counted as jobless in October returned to

work after a 16-day partial shutdown of the government.

The decline came even as the participation rate - the share

of working-age Americans who either have a job or are looking

for one - bounced back from October's 35-1/2-year low.

A separate report showed improving labor market prospects

buoyed consumer confidence in early December.

Contributing to its firm tone, the jobs report showed that

the length of the average workweek reached a three-month high

and that 8,000 more workers were hired in September and October

than previously reported.

In addition, a measure of underemployment that includes

people who want a job but who have given up searching and those

working part-time because they cannot find full-time jobs fell

to a five-year low.

U.S. benchmark Treasury yields hit a three-month high as

traders raised bets the Fed could reduce its bond purchases as

early as its next meeting on Dec. 17-18, though they later eased

back and finished the day little changed. Major U.S. stock

indexes rose, with the S&P 500 ending a five-day losing streak

with its best gain in nearly a month.

The financial market reaction showed investors are less

anxious about the Fed's impending wind down of asset buying than

six months ago, when the first hints from Fed leaders of a

pullback sent stock prices tumbling and bond yields surging.

The central bank has been buying $85 billion in Treasury and

mortgage-backed bonds each month to hold long-term borrowing

costs down in a bid to spur a stronger economic recovery.

Chicago Fed President Charles Evans, who has been an

outspoken advocate for the Fed's stimulus program, said on

Friday he was open to trimming purchases this month, although he

would prefer to see an even healthier jobs market.

"I'll be open-minded," he told Reuters Insider. "Everything

else (being) equal, I would like to see a couple of months of

good numbers, but this was improvement."

Many economists still expect the central bank to wait until

March before dialing back its bond purchases, but a Reuters poll

of big bond dealers found a growing number now see December or

January as likely.

MIXED ECONOMIC DATA

While labor market and consumer spending indicators are

strengthening, the housing market and business spending have

slowed. Inflation is still low, which economists say will make

Fed officials cautious in pulling back its stimulus.

Economists also believe the Fed will be wary of dialing back

bond purchases before lawmakers strike a deal to fund the

federal government. That could come as soon as next week,

however. Congressional aides have said negotiators are down to

the final details.

A separate report from the Commerce Department showed

consumer prices were steady in October, after having risen by

0.1 percent for three straight months. Over the past 12 months,

prices rose 0.7 percent, the smallest gain since October 2009.

Excluding food and energy, prices were up just 0.1 percent

for a fourth straight month. These so-called core prices were up

only 1.1 percent from a year ago. Both inflation measures

remained well below the Fed's 2 percent target.

"While fiscal issues appear less ominous and employment

prospects look favorable, we still think that before pulling

back on asset purchases the Fed would like to see more evidence

that housing is stabilizing and that inflation is finding a

floor," said Michael Feroli, an economist at JPMorgan.

The drop in the unemployment rate brought it closer to the

6.5 percent level that policymakers said would trigger

discussions over when to raise interest rates from their current

levels near zero.

Some economists think the Fed will lower that threshold to

convince markets that any rate hike is a long way off.

"We expect that when tapering starts, it will be coupled

with stronger forward rate guidance, including a cut in the

unemployment rate threshold," said Ted Wieseman, an economist at

Morgan Stanley in New York.

DETAILS UPBEAT

The job gains in November were broad-based, with 63.5

percent of industries increasing employment. Private-sector

payrolls rose 196,000. But government employment also increased

as hiring by state and local governments offset a drop in

federal employment.

Manufacturing payrolls moved up 27,000, the fourth straight

monthly gain and the largest since March 2012. Construction

employment rose 17,000, building on an October increase even

though the housing market has lost some momentum.

Growth in retail employment slowed, with the sector adding

22,300 last month compared to 45,800 in October. A late

Thanksgiving holiday could have resulted in some seasonal hiring

not being captured in November's report.

Leisure and hospitality, as well as professional and

business services payrolls, showed gains, but at a slower pace

than in October.

Average hourly earnings rose by four cents last month, while

the length of the workweek edged up to an average of 34.5 hours

from 34.4 hours - both bullish signs for the economy.