U.S. Treasuries surged on Friday, pushing yields on two-year notes to new historic lows after a report showed the unemployment rate jumped to a four-year high in August, cementing hopes for another Federal Reserve interest rate cut in October.

The Labor Department said the unemployment rate leaped to 4.9 percent in August from 4.5 percent in July, much higher than the rise to 4.6 percent economists had forecast.

The economy shed 113,000 jobs in August, more than the 33,000 drop economists had expected. But July's number was revised to show a 13,000 job gain compared with an originally reported 42,000 decline.

``This report means the economy is still losing jobs, and we'll probably have another Federal Reserve rate cut, and maybe more than one,'' said Astrid Adolfson, an economist at MCM Moneywatch.

The dour employment report raised new fears that consumers could pull back on spending and tip the economy into a recession. Consumer spending, which drives two-thirds of economic activity, has helped keep the economy from contracting even as businesses have aggressively slashed capital spending.

The report came a day after data showing the large services sector of the economy has contracted for four of the past five months, indicating that the year-long recession in manufacturing may be spreading to the broader economy.

Futures contracts on the federal funds rate roared higher to fully reflect the view the Fed will cut rates by a quarter-percentage point at its next meeting on October 2. Those contracts also began pricing in a 50 percent chance of another quarter-point rate cut by the early November meeting.

The Fed has cut its overnight bank lending by three percentage points this year to 3.5 percent in its heated effort to help the economy by spurring more borrowing and spending.

Treasuries extended gains as U.S. shares fell on worries that consumer spending could take a hit on the rise in unemployment, further eroding corporate profits. A stinging slide in equities has helped fuel a rally in Treasuries in recent months.

The broader Standard & Poor's 500 index fell 1.3 percent to near its lowest level since late 1998, while the Dow Jones industrial average lost nearly 2 percent and the Nasdaq Composite Index fell nearly 1 percent. In the past three months, the Nasdaq has tumbled 24 percent and the S&P has lost 15 percent.

``The equity market is not forecasting a recovery like it did 10 years ago. You weigh that in with the employment report, and the drop in equities could curtail consumer spending at a time when the business sector can't weather that type of thing,'' said Sadakichi Robbins, head of global fixed-income trading at Bank Julius Baer.

``This is very dangerous,'' Robbins said.

At 11:50 a.m. EDT, two-year Treasury notes were up 7/32 to 100-6/32, yielding 3.51 percent, the lowest since the securities were first issued in 1972. Five-year notes rose 16/32 to 101-12/32 to yield 4.29 percent.

Benchmark 10-year notes climbed 20/32 to 101-20/32 to yield 4.79 percent, and 30-year bonds rose 24/32 to 100-3/32, yielding 5.37 percent.

December T-bond futures rose 25/32 to 105-17/32.

Treasuries have been whipped around this week by conflicting reports on the economy. On Tuesday the market suffered one of its largest one-day losses of the year after the National Association of Purchasing Management's August manufacturing survey rose by the largest amount in five years.

The survey raised hopes that manufacturing, which led the economy into the slowdown, was on the mend even though the survey still indicated the sector is in a 13-month recession.

But NAPM's measure of activity in the vaster service sector showed sharp deterioration and contraction during four of the past five months. The weak report, along with warnings from technology firms, spurred another sell-off in equities that prompted investors to stash funds in relatively safe government debt.

One positive note in the employment report was that the service sector added 72,000 jobs in August after shedding 34,000 in the previous month. Most of the job losses in August were concentrated in manufacturing, which lost 141,000 jobs.