WASHINGTON (MarketWatch) — The U.S. economy added a less-than-expected 103,000 jobs in the final month of 2010, but the nation’s unemployment rate fell to 9.4% and touched the lowest level in a year and a half, the Labor Department reported Friday

Combined payrolls for November and October were also revised higher by 70,000 jobs, the government said.

The increase in jobs fell short of market projections. Economists surveyed by MarketWatch had predicted a net 175,000 gain, with many raising their forecasts earlier this week after another key report indicated a pickup in hiring. See MarketWatch calendar of key economic indicators.

“The jobs numbers are mildly disappointing,” said Stephen Stanley, chief economist of Pierpont Securities.

In zig-zagging action Friday, stocks moved lower in midafternoon trades, as the jobs report and renewed concerns about the health of U.S. banks weighed on stocks. Read Market Snapshot.

The market appeared to get a boost from Federal Reserve Chairman Ben Bernanke, who told U.S. lawmakers Friday the central bank intends to keep interest rates low. See related Bernanke story.

The unemployment rate, meanwhile, fell to 9.4% from 9.8% in the biggest one-month drop since April 1998, according to a separate survey of 60,000 households. Yet the surprisingly large decline is not as positive as it appeared, economists said. About half of the decrease stemmed from people dropping out of the labor force.

The number of people officially classified as unemployed fell last month to 14.5 million from 15 million.

“We are still not seeing the kind of job creation we need to see to inspire confidence,” said Jim Baird, chief investment strategist at Plante Moran Financial Advisors. See more reaction to payrolls report.

The slow U.S. recovery since the end of the recession in mid-2009 is partly the result of high unemployment, which depresses consumer spending, the single largest source of the nation’s economic growth.

Increased hiring by businesses more confident in a U.S. recovery is seen as the key to nursing the economy back to good health. The unemployment rate spiked to a 28-year high of 10.1% in October 2009. Before the 2007-2009 recession began, the jobless rate stood below 5%.

An alternative measure of the unemployment rate, which includes discouraged workers and those forced to work part-time because of the weak economy, fell to 16.7% last month from 17% in November.

Of the 14.5 million persons unemployed in December, 44.3% had been jobless for 27 weeks or more. More than 8 million Americans lost their jobs during the height of the recession, which has triggered the longest bout of extended unemployment since World War Two.

Nonetheless, the modest increase in jobs last month is one of many signs that the U.S. economy is gradually emerging from its malaise.

“Taken altogether it was not a bad report. Jobs are not coming back as quickly as they were in prior recoveries, but it’s heading in the right direction,” said Chief Executive Scot Melland of Dice Holdings, which runs online job sites for professionals in finance, health care and technology.

Earlier this week, for example, the giant payroll-processing firm ADP reported a surprisingly large 297,000 gain in private-sector employment last month. ADP data and the government’s payroll report track each other very closely over time, though some months can show large gaps between the two. That appeared to be the case in December.

“We always thought that looked too good to be true at a time when all the other indicators had improved only modestly,” said Paul Dales, senior U.S. economist at Capital Economics.

The number of U.S. workers who file applications for jobless benefits each week, meanwhile, has steadily fallen from as much as 500,000 last August to around 400,000. Economists say sustained job growth usually occurs when weekly claims fall below the 400,000 level on a consistent basis. See MarketWatch article.

“The labor market is improving. We’ve seen evidence of that,” Stanley of Pierpont said.

Still, he and other economists say the U.S. will have to add jobs at a much faster clip to drive down the unemployment rate to pre-recession levels.

While ADP’s and Labor Department’s private-sector payrolls often go in the same direction, there was a big gap in December.

The economy needs to create about 125,000 jobs each month just to keep up with natural growth in the U.S. working population — high school students, college graduates and immigrants entering the labor market.

“It’s not the jobs aren’t being created, but it is frustratingly slow,” Baird said.

All of the jobs created last month were in the private sector, which added 113,000 positions. The private sector accounts for about 70% of all U.S. employment.Government jobs fell by 10,000.

Most of the hiring occurred in the fields of leisure, hospitality and health care. Leisure and hospitality added 47,000 jobs and health care employment rose by 36,000.

The manufacturing sector also added 10,000 jobs.

Average hourly earnings in December rose 3 cents, or 0.1%, to $22.78. Economists polled by MarketWatch expected a 0.2% increase. Earnings have risen 1.8% over the past 12 months.

The average workweek held steady at 34.3 hours.