Employers created 169,000 jobs last month and the unemployment rate fell unexpectedly to 4.9 percent, its lowest since August 2001 — reminders of the economy's vigor before Hurricane Katrina.

While August's job-creation tally fell slightly short of the 190,000 gain expected by Wall Street, job growth in June and July was stronger than previously thought, the Labor Department (search) said on Friday, bumping up its tally for those two months by a combined 44,000.

Financial markets initially seized on the weaker-than-expected August measure, sending prices for government bonds up and the value of the dollar down. But some of that action quickly reversed as traders digested the data.

"You've got decent payroll growth, which tells you the economy had some nice upside momentum going into Katrina," said Steve Ricchiuto, chief U.S. economist at ABN AMRO in New York. "But it doesn't tell what the economy has done after Katrina and that's really the problem for the marketplace right now."

Job gains in August were broad-based, although factory employment slipped by 14,000 — the third consecutive monthly decline. Over the past year, the manufacturing sector has shed 110,000 workers.

Hurricane Katrina did not impact the August job count, since it crossed Florida and slammed into the Gulf Coast after the government had surveyed employers. But economist expect it to hurt payroll employment this month.

Overall, however, analysts believe the storm, which killed an untold number of people and left thousands more homeless, will prove only a temporary set-back to the $12 trillion U.S. economy.

The decline in the unemployment rate came as a separate survey of households also found job creation robust. Analysts had expected the jobless rate to hold steady at 5.0 percent.

Last month's 4.9 percent reading was the lowest since before the September 11, 2001, attacks and offered a reminder that labor-market conditions had been improving before Katrina struck. The unemployment rate has fallen one-half percentage point since February.

The tightening job market has been a key factor in the thinking of policy-makers at the Federal Reserve, who began pushing short-term interest rates higher in June 2004 in an effort to keep inflation tame. Ten straight quarter-percentage-point hikes have taken overnight rates up to 3.5 percent.

The storm surge that breached levees in low-lying New Orleans and battered other towns along the coast brought with it a sea change in expectations for further interest rate increases from the U.S. central bank.

Futures markets show investors expect just one more rate hike this year, with even another quarter-percentage point hike at the Fed's next meeting on September 20 uncertain. Before Katrina, rate rises had been expected at each of the central bank's next two meetings.

"This is a view of the economy as we knew it, the world has changed a bit," said James Glassman, senior economist at JPMorgan Chase & Co. in New York. "It's highly likely that the Fed will pause for a while."

The jobs report is usually eyed closely by financial markets as a potential indicator of the direction of the economy and interest rates. But analysts said the uncertain outlook in the wake of the hurricane lessened the usefulness of the August figures.

"It just seems to pale into insignificance," said Sean Callow, senior currency strategist at Westpac Banking Corp. in New York.

The report showed construction payrolls grew by 25,000 — a figure sure to swell in the months ahead as rebuilding after Katrina gets under way.

The service-side of the economy created 156,000 jobs, spread across most sectors.

Average hourly earnings increased two cents, or 0.1 percent, with the year-on-year reading edging down to a 2.7 percent gain from July's upwardly revised 2.8 percent. The length of the average work week held steady at 33.7 hours.