Stocks, oil drop after U.S. jobs data

By Caroline Valetkevitch

NEW YORK (Reuters) - U.S. and European stocks fell more than 2 percent on Thursday after U.S. government data showed the U.S. economy shed more jobs than expected in June, dampening the outlook for an economic turnaround.

The U.S. jobs data boosted the safe-haven appeal of Treasuries and the dollar, sending the greenback up against major currencies and driving up the price of U.S. government bonds. Oil prices fell about 4 percent.

After the Standard & Poor's 500 .SPX in the second quarter posted its best performance since the fourth quarter of 1998, investors have been looking for evidence of a sustainable economic recovery before buying stocks further.

The Labor Department said U.S. employers cut 467,000 jobs in June, while the unemployment rate rose to 9.5 percent from 9.4.

The world's biggest economy was expected to have lost 363,000 non-farm jobs, while the unemployment rate was seen ticking up to 9.6 percent.

"Rising unemployment is bad for the entire economy," said Sasha Kostadinov, portfolio manager at Shaker Investments in Cleveland, Ohio. "It's not positive for discretionary stocks. It's not positive for financials -- because there's a direct correlation between the high unemployment rate and charge-offs and delinquent payments."

The Dow Jones industrial average .DJI fell 223.32 points, or 2.63 percent, to close at 8,280.74. The Standard & Poor's 500 Index .SPX was down 26.91 points, or 2.91 percent, at 896.42. The Nasdaq Composite Index .IXIC was down 49.20 points, or 2.67 percent, at 1,796.52.

The New York Stock Exchange extended trading by 15 minutes beyond the regular closing time due to connectivity glitches. U.S. markets will be closed on Friday for the Independence Day holiday, with the Fourth of July falling on Saturday this year.

The pan-European FTSEurofirst 300 .FTEU3 index fell 2.6 percent to close at 843.0 points.

Unemployment in the euro zone hit 9.5 percent in May, the highest level in 10 years, the European Central Bank reported on Thursday.

Stocks in Brazil, Mexico and other Latin American markets also were lower. Japan's benchmark Nikkei closed down 63.78 points at 9,876.15, partly on caution ahead of the U.S. jobs data.

In the U.S. Treasury market, the benchmark 10-year note was up 12/32, with the yield at 3.5023 percent, versus Wednesday's close of 3.55 percent.

In currency markets, the euro was down about 1 percent at $1.4004 from a previous session close of $1.4150. The dollar was up against a basket of major trading-partner currencies, with the U.S. Dollar Index .DXY up 0.83 percent at 80.297 from a previous session close of 79.634.

Demand for the euro fell after European Central Bank President Jean-Claude Trichet said euro-zone activity would likely remain weak for the rest of the year, analysts said.

The European Central Bank, as expected, kept interest rates unchanged at 1 percent.