Europe's central bank chief warned that although the downturn had eased, weak economic activity would hamper growth for the rest of the year and only a gradual recovery would emerge by mid-2010.

U.S. data showed the world's biggest economy lost 467,000 jobs in June, more than 100,000 greater than expected by economists, breaking a four-month trend of moderation in job losses.

"The job market is terrible. It's as bad as we've seen in our life-time," said Keith Hembre, chief economist at FAF Advisors in Minneapolis.

The unemployment rate rose to 9.5 percent, the highest since a matching jobless rate in August 1983.

"It looks like the economy was still losing substantial momentum as the second quarter came to a close. This report is weak across the board," said William Sullivan, chief economist at JVB Financial Group in Florida.

Rising unemployment is emerging as the biggest challenge to recovery, which governments around the world are trying to stoke with record low interest rates and by pumping trillions of dollars into their economies.

In Europe, Central Bank President Jean-Claude Trichet cautioned about economic growth after the ECB left rates at 1 percent as expected, a record low.

"Economic activity over the remainder of this year is expected to remain weak but should decline less strongly than was the case in the first quarter of 2009," he said.

The jobless rate in the 16-nation euro zone rose to 9.5 percent in May from April's 9.3 percent, the highest rate since 1999, European Union data showed.

"May's sharp increase in euro zone unemployment demonstrates that the 'green shoots of recovery' are not yet showing up in the labour market," economist Martin van Vliet of ING said.

"With the economy still in recession and any near-term recovery likely to be muted, unemployment looks set to continue to rise this year and next."

Statistics office Eurostat calculated that 3.4 million people in the currency zone lost their jobs in the year from May 2008, with 5.1 million joining jobless queues across the 27-nation EU.

STOCK MARKETS FALL

World stocks extended losses and Wall Street looked set to follow suit after the U.S. job data while the euro dipped against the dollar following Trichet's comments about weakness.

In Sweden, the central bank cut rates to 0.25 percent from 0.50 percent in a surprise move, putting official rates at their lowest since records began in 1907.

It also offered 100 billion crowns (7.9 billion pounds) of loans to banks to foster lending as it sought to reverse its worst recession since the 1940s.

In Britain, data showed a decline in activity in the construction sector accelerated in June and UK lenders said they did not expect much of a pick-up in demand in the third quarter even though they would make more credit available.

The Bank of England's David Miles warned parliament that while the next few quarters could see a rebound, a return to rapid growth was unlikely.

In Japan, Economics Minister Yoshimasa Hayashi said he will do his utmost to prevent price falls from persisting in the economy, which is facing its second bout of deflation this decade.

In a sharp contrast to weakness in industrialised nations, India's finance ministry said the Asian giant could see growth of around 7 percent this year and more in coming years if it makes sweeping reforms.

"India should be back on the new trend growth path of 8.5 to 9 percent per annum provided the critical policy and institutional bottlenecks are removed," the report said.

(Reporting by Reuters bureaux worldwide; Writing by Eric Onstad; Editing by Dominic Evans)