U.S. employment fell for the first this year in June as thousands of temporary census jobs ended and private hiring grew less than expected, dealing a blow to President Barack Obama who has identified job creation as a key priority.

Nonfarm payrolls dropped 125,000, the largest decline since October, as temporary census jobs fell 225,000, the Labor Department said on Friday.

However the unemployment rate fell to 9.5 percent, the lowest level since July, as people left the labor force.

The report will add to worries the recovery from the longest and deepest recession since the 1930s could be faltering.

Analysts polled by Reuters had expected employment to fall 110,000 last month, with the jobless rate edging up to 9.8 percent from 9.7 percent in May.

The government revised data for April and May to show 25,000 more jobs created than earlier reported.

Private employment, considered a better measure of labor market health, rose 83,000 in June, less than market expectations for a gain of 112,000 jobs.

Public unhappiness with the economy, especially after a record $787 billion package of spending and tax cuts, is eroding Obama's popularity. Obama, has tried to put the blame on policies of the previous administration.

With voters in an anti-Washington, anti-incumbent mood, failure to put back to work the more than 8 million Americans who lost jobs during the recession could cost the Democratic Party dearly in the November mid-term elections.

Payrolls in the dominant services sector rose 91,000 last month after increasing 20,000 in May.

Temporary help employment rose 20,500, while retail hiring fell 6,600.

In the goods-producing sector, payrolls fell 8,000 in June, pulled down by declines in construction as home building dropped sharply following the end of a government tax credit.

Manufacturing employment rose 9,000 after a 32,000 gain in May.

With unemployment stubbornly high, household spending has turned sluggish in recent months, threatening to create a vicious cycle that stock market investors and some analysts worry could tip the economy back into recession.

"We are in a difficult situation. I don't think there is political will to have another stimulus program and even if we did I am not sure people feel it would be that effective," said Stephen Bronars, a senior economist at Welch Consulting in Washington.

The Federal Reserve is also in a bind. It has held benchmark overnight interest rates close to zero since December 2008 and has pumped more than $1 trillion into the economy.

Fed officials believe a sustainable recovery has taken hold, but are watching cautiously.

The average workweek edged down to 34.1 hours from 34.2 hours in May.