* Nonfarm payrolls rise 113,000 in January * December payrolls gain revised up slightly to 75,000 * Unemployment rate falls to 6.6 percent from 6.7 percent * Average hourly earnings up, work week steady By Lucia Mutikani WASHINGTON, Feb 7 (Reuters) - U.S. job creation slowed sharply over the past two months, turning in the weakest performance in three years and raising the prospect that the economy may be losing momentum. At the same time, however, the unemployment rate hit a new five-year low of 6.6 percent in January even as Americans piled back into the labor market to search for work. The Jekyll and Hyde report from the Labor Department on Friday whipsawed U.S. markets in early trade. Many economists cautioned against reading too much into it given the extreme weather that has hit much of the nation this winter. "It supports the view that momentum is slowing in the first quarter, but it's too early to draw conclusions and we should not be too pessimistic either," said Thomas Costerg, a U.S. economist at Standard Chartered Bank in New York. Nonfarm payrolls rose only 113,000 last month after a meager 75,000 gain in December, the report showed. Economists had expected payrolls to rise 185,000 in January and had looked for a big upward revision to December. Instead, December's figure was revised upward by just 1,000, although November's count was raised by 33,000 to 274,000, the biggest gain since February. Taken together, job growth averaged just 94,000 in December and January, a big slowdown from the 204,000 average for the first 11 months of last year. While weather was believed to have weighed on hiring in December, it did not appear to be a major factor last month. There were strong gains in the weather-sensitive construction sector, and while a survey of households found 262,000 Americans were unable to work due to the weather, the department said that was in line with historical trends. The second straight month of weak hiring - marked by declines in retail, utilities, government, and education and health employment - could be a problem for the Federal Reserve, which is scaling back its monthly bond-buying stimulus program. However, its next policy-setting meeting is not until March 18-19. By then, the economic clouds may have cleared. Most economists stuck to predictions that the central bank would cut its monthly purchase pace by another $10 billion in March, as it did last month and the month before. "We don't think the January report is enough by itself to stop the Fed from tapering again," said Julia Coronado, chief North America economist at BNP Paribas. She said, however, that if hiring in February also proves weak and equity markets decline, the Fed was likely to show "more patience" in tapering its stimulus. The drop in the jobless rate left it flirting with the 6.5 percent level that the Fed has said would trigger discussions over when to raise benchmark interest rates from near zero. But policymakers have made it clear that rates will not rise any time soon even if the unemployment threshold is breached, and they seem certain to revisit their guidance on policy. U.S. stock futures dropped sharply when the data was released, but the market opened higher and major indexes closed with gains of more than 1 percent. Similarly, money flooded into the safety of the bond market but the flow soon ebbed, leaving bond prices up but not as sharply. The dollar sold off against the euro, but that trade also later eased. OPTIMISM TESTED The economy grew at a robust 3.7 percent annual rate in the second half of 2013, buoying hopes that it was kicking into a higher gear after a slow recovery from the 2007-2009 recession. But that optimism is now being tested. A report on Monday showed a surprise drop in factory activity to an eight-month low in January and automakers have reported slower sales. The tenth of a percentage point drop in the jobless rate in January, which took it to the lowest level since October 2008, provided a silver lining in the employment report, and kept hopes of stronger growth alive. Unlike the poll of employers used to calculate the payrolls figures, the household survey from which the jobless rate is derived found more than 600,000 jobs were created in January. The rise in the number of people in the labor market last month also provided an encouraging sign. The participation rate, or the proportion of working-age Americans who have a job or are looking for one, increased to 63 percent. In December it stood at 62.8 percent, the more than 35-year low it hit in October. While a decline in participation over the last year played a role in the 1.3 percentage point drop in the jobless rate since January 2013, rising employment has also been a big contributor. In another bright sign, a broad gauge of the labor market's health - the percentage of working-age Americans with a job - rose to 58.8 percent last month, the highest since October 2012. In addition, 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 dropped to 12.7 percent, its lowest level since November 2008. The report also showed that the long-term unemployed were finding jobs. The duration of unemployment fell to 35.4 weeks last month, the lowest in a year. "We suspect the labor market recovery is healthier than the headline numbers imply," said Scott Anderson, chief economist at Bank of the West in San Francisco. WHERE THE JOBS ARE The private sector accounted for all the hiring in January. Government payrolls fell 29,000. It was their largest decline since October 2012 and reflected losses on all levels of government, including the Postal Service. Manufacturing employment increased 21,000, a sixth consecutive monthly gain. Retail sector jobs fell 12,900 after strong increases in the prior months. It was the first drop since March and was concentrated in the sporting goods, hobby, book and music store area, where payrolls fell 22,300. Construction payrolls bounced back 48,000, with residential construction accounting for the bulk of the gains, after a decrease of 22,000 in December that was pinned on the weather. January's gain was the largest since March 2007. Average hourly earnings rose five cents. The length of the workweek was steady at an average of 34.4 hours. Friday's report included revisions to data on payrolls, the workweek and earnings going back to 2009. The revisions showed 369,000 more jobs were created than previously thought in the 12 months through March 2013.