* Nonfarm jobs rise by less-than-expected 169,000 in August
* Jobless rate falls to 4-1/2-year low of 7.3 percent
* Labor force participation rate lowest since August 1978
* June, July payrolls revised to show fewer jobs added
* Average hourly earnings, workweek rebound
By Lucia Mutikani
WASHINGTON, Sept 6 U.S. employers hired fewer workers than expected in August and the jobless rate hit a 4-1/2-year low as Americans gave up the search for work, complicating the Federal Reserve's decision on whether to scale back its massive monetary stimulus this month.
Nonfarm payrolls increased by 169,000 jobs last month, the Labor Department said on Friday, falling short of the 180,000 Wall Street had expected and adding to signs that economic growth may have slowed a bit in the third quarter.
While economists believe the Fed could still announce a tapering of its monthly bond purchases at its Sept. 17-18 policy meeting, they said the weak data increased chances of a delay.
"A compromise between hawks and doves might be that the tapering will be announced in September but that the purchase amount will be reduced by an even smaller amount than we currently anticipate," said Harm Bandholz, chief U.S. economist at Unicredit Research in New York.
The U.S. central bank has been buying $85 billion in bonds per month to hold interest rates down.
A Reuters poll of big bond dealers conducted after the jobs data was released found that 13 of the 18 institutions expect the Fed to dial back its purchases this month. Of those 13, the median forecast was for a cut of $15 billion.
The dollar fell from a seven-week high against the euro and slumped against the yen after the jobs report. The data also fueled a rally in U.S. government bonds, with the yield on the benchmark 10-year note falling back below 3 percent.
U.S. stocks ended little changed as investors remained jittery over a potential military strike against Syria.
Not only did hiring miss expectations last month, but the job count for June and July was revised to show 74,000 fewer positions added than previously reported.
While the unemployment rate fell a tenth of a percentage point to 7.3 percent, its lowest level since December 2008, the decline reflected a drop in the share of working-age Americans who either have a job or are looking for one.
That participation measure reached its lowest point since August 1978, a further sign of underlying economic weakness. The rate for men touched a record low.
"Declining participation is bad for financing entitlements long-term and the potential economic growth trend," said John Silvia, chief economist at Wells Fargo in Charlotte, North Carolina.
FOCUS ON DATA-DEPENDENT FED
Fed officials have made clear they would base their bond-buying decision on the progress the labor market has made since they launched their third round of 'quantitative easing' a year ago. When they started that round, they were looking at a jobless rate that stood at 8.1 percent.
Still, much of the decline in unemployment has been because people are dropping out of the labor force, partly due to frustration over dim job prospects, and that takes some of the shine off the improving rate.
Some Fed officials have indicated they are ready to scale back their stimulus, but others have been less committal, making it hard to discern where the consensus on the policymaking Federal Open Market Committee lies.
"This is a period where it's even more important to go into an FOMC meeting with an open mind," Chicago Federal Reserve Bank President Charles Evans told reporters on Friday. "There's been cumulative progress on the economy. I can be persuaded that there has been enough improvement."
Kansas City Fed President Esther George, a consistent hawk, said the central bank should start paring the bond purchases this month by about $15 billion "to begin a gradual - and predictable - normalization of policy."
STRUGGLING FOR MOMENTUM
The employment report suggested the economy was struggling to regain momentum after stumbling early in the third quarter.
Consumer spending, home building, new home sales, durable goods orders and industrial production all weakened in July.
"Given the data we have gotten so far, the third quarter is looking like it's going to be on the soft side," said Michael Hanson, a senior economist at Bank of America Merrill Lynch in New York. "The economy, I don't think, has the momentum that many people, probably a number of Fed officials, were hoping for."
The economy grew at a 2.5 percent annual pace in the April-June period. Many economists had expected an acceleration in momentum in the second half of the year.
But there were some bright spots in the jobs data.
Average hourly earnings and the length of the average workweek both bounced back from weak July readings.
Earnings rose five cents, pushing the change over the past 12 months up to 2.2 percent, the biggest gain in more than two years. The length of the average workweek ticked up to 34.5 hours from a six-month low of 34.4 hours in July.
A measure of underemployment that includes people who want a job but who have given up searching and those working part time because they cannot find full-time jobs fell three tenths of a percentage point to a 4-1/2-year low of 13.7 percent.
The private sector accounted for the bulk of the job gains last month, but government payrolls increased 17,000 as local governments hired teachers for the new school year.
Factory employment rebounded after falling in July.
But construction payrolls were flat as both residential and nonresidential construction jobs fell. The decline in residential construction employment could raise concerns of a leveling off in home building.
There was another month of strong job gains in the retail sector. Leisure and hospitality employment also posted solid increases as did health care and social assistance.