UPDATE 2-UK unemployment hits highest since 1994, youth suffer
* Unemployment at highest level in 17 years
* Government accused of choking off recovery
* More than one in five of youngsters without a job
LONDON, Oct 12 (Reuters) - Unemployment in Britain has jumped to its highest level since 1994, with young people hit hardest as private companies fail to make up for job losses in the public sector, piling pressure on the government to boost a stagnant economy.
Deep cuts in state spending will erase more than 300,000 public sector jobs in coming years, while the economy is teetering on the brink of recession again as consumers tighten their belts and key export markets slow down, particularly in Europe.
The government was quick to blame the rise in unemployment to 2.57 million on the global financial crisis and the euro zone turmoil. But calls for it to ease its austerity plans increased as fears of a "lost generation" of young people without hope of a job are growing.
Economists also warned Britons should brace for more bad news as employment numbers tumbled at recession-style rates.
"The figures are a disaster," said economist Alan Clarke of Scotia Capital, adding that the economy was just not strong enough to create jobs.
Less than a week after the Bank of England launched a fresh round of stimulus to prevent a recession, BoE chief economist Spencer Dale told Reuters in an interview that the economy was likely to weaken further in the final quarter of this year.
The Office for National Statistics said the number of people without a job on the ILO measure jumped by 114,000 in the three months to August to 2.57 million, the highest total since October 1994.
The jobless rate hit 8.1 percent, the highest since 1996.
Youth unemployment rose to 991,000, its highest since records began in 1992, driving the jobless rate among eligible 16- to 24-year-olds to 21.3 percent.
John Philpott, Chief Economic Adviser at the Chartered Institute of Personnel and Development, warned that this number looked set to exceed the psychologically important 1 million mark next month.
The government has been banking heavily on private firms to create enough jobs to make up for the losses of private sector jobs, but economists said the drop in employment was worrying.
"The number of people in work plunged 178,000 in June-August, the biggest drop since mid-09 and the kind of decline that previously has only been seen during recessions," said Citi economist Michael Saunders.
Employment Minister Chris Grayling agreed that the figures were "not at all positive".
"What we're now seeing, I'm afraid, is the impact of the international financial crisis, the troubles in the euro zone on the economy in this country," he told the BBC.
The number of Britons claiming unemployment benefit rose by 17,500 in September, below analysts' forecast of a rise by 25,000.
Unions seized on the dire numbers to mount a fresh attack against the government.
"In the middle of the worst international recession for 80 years the Government itself is creating unemployment with 250,000 public sector posts already gone and still more to come. Government policy is hurting but it's not working," said Paul Kenny, General Secretary of Britain's GMB union, the country's third largest.
The coalition government of Conservatives and Liberal Democrats wants to boost growth through lower corporate taxes, fewer labour market regulations and other supply-side measures.
Finance minister George Osborne has also announced a scheme to funnel loans more directly to credit-starved smaller firms, though this plan may not take effect any time soon.
Meanwhile the Bank of England has swung into action and will pump an additional 75 billion pounds ($117 billion) into the economy in order to prevent a renewed recession.
But doubts remain over whether this will be enough of a boost for the economy, which has barely grown over the past year as consumers face a combination of soaring prices, higher taxes and slow wage increases.
The ONS' figures showed that real incomes were still falling as pay increases fell even further behind inflation rates of nearly 5 percent.
Average weekly earnings including bonuses grew by 2.8 percent. Analysts had forecast a rise of 2.9 percent. Excluding bonuses, earnings rose only 1.8 percent, below analysts' forecasts of 2.0 percent.
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