* Economy adds 39,800 jobs vs forecast of 5,000
* Data raises likelihood of higher rates in 2013
* Jobless rate drops to four-year low of 7.1 pct
* Full-time jobs dominate, private sector hiring strong
By Louise Egan
OTTAWA, Jan 4 (Reuters) - Canada's economy created far more jobs than expected in December and the jobless rate slid to a four-year low, bolstering the likelihood of a central bank interest rate rise later this year.
The economy added 39,800 jobs in December from November, Statistics Canada said on Friday, well above market expectations for 5,000 jobs and surpassing even the most bullish forecast in a Reuters poll of analysts.
In a report that appeared at odds with other figures pointing to sluggish growth, Statscan said the unemployment rate dipped to 7.1 percent from 7.2 percent in November.
It was the third surprisingly strong jobs report over the past four months and contrasted with the situation in the United States, where non-farm payrolls rose a disappointing 155,000 last month.
Analysts expected little Canadian hiring in December, ahead of a recent deal by U.S. lawmakers and the White House to avert potentially crippling austerity measures due to take effect early this year.
"My initial response is not only are they defying expectations, they are defying gravity," Doug Porter, deputy chief economist at BMO Capital Markets, said of the Canadian jobs numbers.
Canada has recovered all the jobs lost during the 2008-09 recession, although hiring has been unsteady as businesses fret about headwinds from the United States and Europe.
Prime Minister Stephen Harper said those headwinds could mean more "bumps in the road" for the Canadian economy and people should not get too excited by a single month's data.
However, he noted that employment has been growing steadily for several years.
"We have more Canadians working today than ever before and we are one of the very few advanced industrial economies that can say that," Harper told reporters.
The Bank of Canada does not formally target employment and inflation has been below its 2 percent target. But the strength of the jobs market suggests the economy entered 2013 in a stronger position than other economic indicators have suggested.
"I don't think the bank will be in any rush to do anything. But it likely means they'll keep a mild hawkish bias in place," said Porter.
The Bank of Canada has held rates at 1 percent since September 2010, but has insisted for the past several months that the next move will be up, not down.
Most primary securities dealers surveyed by Reuters expect a move in the fourth quarter of this year.
Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that traders increased bets on a rate increase in late 2013 after the employment report.
The Canadian dollar rallied after the data and at 1:20 p.m. (1820 GMT) was at $0.9866 to the U.S. dollar, or $1.0137, compared with C$0.9880, or $1.0121, at Thursday's North American close.
Another Statscan report on Friday showed producer prices fell 0.3 percent in November from October as gasoline and other fuel prices fell. Raw materials prices slid 1.9 percent. Both indices were down from a year earlier.
TOO GOOD TO LAST
Taking their cue from the U.S. jobs data, analysts forecast the latest trend of Canadian job creation would not continue.
According to Statscan, the economy churned out 59,300 jobs in November, the equivalent of 534,000 in the United States, and outsized gains in September and August. October saw a lull.
"There is still a sense that the levitation act on jobs can't continue for much longer," said Mark Chandler, head of fixed income and currency strategy at Royal Bank of Canada.
"There's still some doubt cast around these numbers even though they look solid in all the details."
Statscan's household survey tends to be volatile from month to month, so analysts prefer to look at the six-month trend, which showed average job gains of about 26,000.
In 2012 as a whole, employment grew by roughly the same amount as in 2010, 1.8 percent, or 312,000 jobs. That was up from 1.1 percent in 2011, but weaker than the pace of growth in the pre-recession years of 2006 and 2007.
Most of the details in the December report were positive. All the gains were in full-time jobs and most were in the private sector.
Employment gains were spread across goods-producing and services sectors, with the strongest hiring in transportation and warehousing, construction and health care and social assistance.
"It is very tough to reconcile this with a lot of the other indicators we are seeing on the economy, but we have to accept the numbers as presented. Almost every aspect of this report was strong," said Porter.