By Brian Blackstone

WASHINGTON -- A third-straight sharp drop in U.S. payrolls confirmed Federal Reserve Chairman Ben Bernanke's recent warning that the U.S. economy may be in recession, as the unemployment rate moved sharply higher.

The data suggest additional interest rate cuts by the Fed are likely, even though the already-aggressive response by officials doesn't leave them too much room for additional easing.

Nonfarm payrolls fell 80,000 in March, the Labor Department said Friday, its biggest decline in five years, after falling by 76,000 in both January and February. Both were revised to show even bigger losses.

Had it not been for a rise in government jobs last month, payrolls would have fallen by around 100,000.

The unemployment rate, which is calculated using a separate survey of households, jumped 0.3 percentage point to 5.1%, the highest since September 2005, when it was also 5.1%.

Average hourly earnings increased $0.05, or 0.3%, to $17.86. That was up just 3.6% from a year earlier, suggesting wage costs remain under wraps. Fed officials are counting on the slack that comes from a slowing economy to offset higher energy, food and commodity prices and the weak dollar and keep inflation in check.

Wall Street economists had expected a 50,000 decline in payrolls and a 5% unemployment rate. A closely-watched report from ADP and Macroeconomic Advisers that attempts to mirror the jobs report had signaled a slight rise. But a surprising spike in new jobless claims to over 400,000 -- a level usually associated with recession -- caused some economists to scale back their forecasts into the minus column.

The Fed has lowered the fed funds rate at which banks lend to each other by three percentage points since September to 2.25% to contain the effects of a credit and housing crisis on the broader economy. With the jobs data providing clear proof that the economy is buckling, the Fed will face pressure to lower rates even more.

Mr. Bernanke on Wednesday warned for the first time that "a recession is possible." Yet last month's payroll decline won't come as too much of a surprise, as Mr. Bernanke also told lawmakers Wednesday that "much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year."

Still, the jobs slump may heighten fears at the Fed of a negative "feedback loop" in which financial market strains lead to a weaker economy, which in turn leads to more financial turbulence.

The Labor Department said hiring last month in goods producing industries fell 93,000. Within this group, manufacturing firms cut 48,000 jobs. the sector has lost jobs every month for almost two years. Automobile employment fell 24,000, the Labor Department said. "This decline largely reflected the impact of a strike at an automotive parts maker," Bureau of Labor statistics Commissioner Keith Hall said in a prepared statement.

Construction employment was down by 51,000, the ninth-straight drop. Residential building bore the brunt of the decline, but nonresidential construction jobs fell as well, suggesting that the housing slump is broadening.

Service-sector employment rose just 13,000 in March and only managed 12,000 new jobs for the entire first quarter. Business and professional services companies shed 35,000 jobs, and the financial sector lost jobs for the eighth-straight month, reflecting recent credit and mortgage-market turmoil.

Temporary employment, which economists consider a leading indicator for future job trends, fell by over 21,000 last month.

Education and health services employment, in contrast, advanced by 42,000. Leisure and hospitality rose 18,000, while retail trade lost 12,400 payrolls.

The government added 18,000 jobs.

One bright spot in the report was a 0.1 percentage point rise in the average workweek to 33.8 hours. A separate index of aggregate weekly hours also rose.