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* Employment falls 22,600, well under forecasts of +7,500
* Unemployment stays at 5.8 pct as participation drops again
* Revives risk of rate cut, local dollar dives to lowest since mid-2010
By Wayne Cole
SYDNEY, Jan 16 (Reuters) - Australian employers shed jobs at the fastest pace in nine months in December while full-time positions suffered their biggest drop since mid-2011, an unlooked-for blow that hammered the local dollar to its lowest in over three years.
Investors reacted by reviving the prospect of another cut in interest rates from the Reserve Bank of Australia (RBA), which has been signalling it would rather not ease again from the current record low of 2.5 percent.
Market odds on a move by June narrowed to near one-in-two
In a report littered with unwelcome milestones, the Australian Bureau of Statistics found employment fell by 22,600 in December, confounding forecasts for a modest rise of 7,500. Full-time jobs fared even worse by diving 31,600.
While unemployment did stay at 5.8 percent for a third straight month, it was only because the participation rate dropped to its lowest since April 2006.
"We had hoped things were getting better but this just re-establishes the poor trend that lasted for most of 2013,"" said Michael Turner, a strategist at RBC Capital Markets.
"This probably won't be enough on its own to get the RBA over the line for a cut. But if the jobless rate were to start rising again, it might not have much tolerance for a rate above 6 percent."
The central bank has shown a preference for any further easing in policy to come via a lower Australian dollar, rather than a decline in borrowing costs that could add fuel to an already hot housing market.
It would have found some comfort, therefore, in the currency's rapid fall on Thursday, as it sank almost a full U.S. cent to $0.8805
GLIMMERS AMID THE GLOOM
The drop in jobs was also likely to generate a lot of gloomy media headlines that could threaten the recent recovery in consumer confidence and spending.
The news around employment has been worrisome for a while with a number of high-profile companies announcing future redundancies, including airline Qantas
Yet there are statistical straws in the wind suggesting firms are rediscovering an appetite for hiring.
A quarterly survey of 2600 employers by recruitment business Hudson out earlier this week showed around 23 percent of firms expected to raise their headcount this year, compared to just 11 percent that planned reductions.
Australia's largest online job site, SEEK, reported a strong rise of 3.2 percent in the number of new job ads in November, the largest increase since April 2011. As a result, new ads rose faster than new applicants for the first time in a year.
Another positive is that it is becoming cheaper to employ more people. A moderation in wage growth and improving productivity led to a 0.4 percent fall in real unit labour costs in the year to September.
"Labour demand is dependent on more than just output growth. Labour costs also matter," notes Michael Workman, senior economist at CBA.
"Our labour demand indicator, based on growth in output and labour costs, suggests jobs growth can continue to run at around a 1 percent per annum pace in the period ahead."
As a result he expects unemployment to peak near 6 percent in the first half of this year, still a favourable outcome compared to most other rich nations.
(Editing by Eric Meijer)
((Wayne.Cole@thomsonreuters.com)(612 9373 1813)(Reuters Messaging: wayne.cole.thomsonreuters.com@reuters.net))
Keywords: AUSTRALIA ECONOMY