US RATE FUTURES-UPDATE 1-Traders betting on Sept 2011 Fed hike

(Updates probability seen for rate hike, comment)

CHICAGO, Sept 3 (Reuters) - U.S. short-term interest rate futures traders raised expectations of a Federal Reserve rate hike next year, after a government report showed the economy lost fewer jobs in August than expected.

The U.S. Labor Department reported non-farm payrolls declined by 54,000 jobs last month, less than the 100,000 loss economists had expected.

Traders now see about a 68 percent chance the Fed will increase its target interest rate at the U.S. central bank's Sept 2011 meeting, trading in Fed funds futures at the Chicago Board of Trade shows.

Trading in Fed funds futures that mature in October 2011, which fully capture expectations for any policy change the prior month, fell 4 basis points to 99.58.

The percentage assumes a Fed hike would put the target rate for overnight lending between banks to 0.50 percent, up from the current range of zero to 0.25 percent.

Some market participants had been hedging against the possibility that the Fed's next move might be to lower short-term rates to head off a weakening economic recovery. Friday's jobs report appears to have allayed those concerns.

"This leaves the Fed on hold for now," said Michelle Meyer, senior U.S. economist at Bank of America Merrill Lynch in New York. "Unless the Fed sees a double-dip recession or deflation as a risk, the Fed will be in wait-and-see mode and we do not expect Fed hikes until 2012."

Before the report, traders saw about a 52 percent chance of a rate hike at the September 2011 policy-setting meeting.

Traders still are not fully pricing in a rate hike until December 2011, futures show. (Reporting by Ann Saphir; additional reporting by Julie Haviv; Editing by Padraic Cassidy)