The recovery in the US jobs market came to a grinding halt in December as businesses added just 74,000 new jobs, the lowest rise since January 2011.

The report from the US Department of Labor shocked economists on Friday who had been expecting the number to increase by at least 200,000. The report said the unemployment rate had dropped to to 6.7% in December, but the fall was explained almost entirely by people giving up on their search for work.

Only 62.8% of the adult workforce participated in the jobs market in December, down 0.2 percentage points from the previous month. It was the lowest participation rate – the number of people employed or actively looking for work – since the 1970s.

The White House called for Congress to move to extend long-term unemployment benefits. The benefits, which ended last year, are now the subject of a fierce partisan debate in Washington.

Jason Furman, chairman of the White House council of economic advisers said the economy was still improving despite the weak jobs numbers but there was “a lot more work to do”, saying that long-unemployment was an “immediate and pressing challenge”.

John Boehner, Republican House speaker, said: “Today’s disappointing report shows, once again, that the president’s policies are failing too many Americans, many of whom have simply stopped looking for work.”

The sluggish growth in jobs was surprising. Other reports had indicated strong growth in the market and there are wider signs that the US’s economy is strengthening. The Labor Department even revised up its estimate of jobs growth for November, reporting a confirmed rise of 241,000, up from an initial estimate of 203,000. It said 200,000 jobs were added in October.

The retail sector added the most jobs, at 55,000. Jobs were also gained in professional and business services, up 19,000, manufacturing, which added 9,000, and mining, which added 5,000.

But weakness in the jobs market spread through a number of industries; information and construction lost jobs, the government shed jobs and in total, the service sector added just 90,000 jobs, well below the previous month’s figure of 175,000.

“The economy, based on any number of other indicators, has been picking up steam of late which makes today’s number … curious,” Dan Greenhaus chief global strategist at broker BTIG wrote in a note to clients.

The report will be closely studied by the Federal Reserve, which last month started unwinding its $85bn-a-month economic stimulus programme, known as quantitative easing. At the time the Fed said it believed the recovery in the US economy was now sufficiently strong for it to cut back on its massive bond buying programme.

Before Friday's report, there had been positive signs that the US economy and the jobs market were strengthening. On Thursday ADP, the giant US payroll processor, reported that the private sector ended 2013 on a roll, adding 238,000 new jobs, the strongest growth of the year. The figure followed several months of good growth and indicated a broad-based recovery in the jobs market. Small businesses, seen as an engine of jobs growth, added 108,000 positions.

ADP’s report came as outplacement firm Challenger, Gray & Christmas reported that the number of announced job cuts fell 3% last year to 509,051, the fewest layoffs reported by the firm since 1997. December’s layoffs, 30,623, were 6% lower than December 2012’s layoffs.

“The recovery has been slow, but every year since the recession has been better than the previous one,” said John Challenger, chief executive officer of Challenger, Gray & Christmas.

“The coming year will hopefully see improved conditions for small and medium sized businesses that have struggled so far in this economy. Big businesses, on the other hand, have done rather well, regardless of the industry,” he said.

The unemployment rate declined almost a full percentage point in 2013 ending the year at 7% – nearly twice the 0.5-point decline during 2012. The fall was, however, driven in part by people effectively giving up on their job searches.