WASHINGTON (Reuters) - The U.S. unemployment rate hit its highest in four years during July as employers cut jobs for a seventh straight month, though less severely than predicted, a Labor Department report showed on Friday.

The rising toll of job losses and plunging new-car sales in July fueled worry that a recession may be unavoidable and helped drive stock prices lower again.

The jobless rate climbed to 5.7 percent from 5.5 percent in June as 51,000 jobs were eliminated in July, bringing losses for the year to 463,000. Economists had expected 75,000 jobs would be cut last month but had forecast the unemployment rate would rise only to 5.6 percent.

In a separate report, the Institute for Supply Management said manufacturing activity held steady in July and noted some moderation in inflation pressures. Its index of national factory activity slipped a bit to 50 from 50.2 in June -- with 50 being the dividing line between expansion and contraction.

“If you look at ISM and the unemployment number together, it suggests an economy that is, at best, stuck in neutral,” said Subodh Kumar, chief investment strategist with Subodh Kumar & Associates in Toronto.

Stock prices dropped, with the Dow Jones industrial average off 51 points to end at 11,326 and the Nasdaq Composite Index down 14 points to 2,310. Prices for U.S. Treasury debt securities rose moderately as investors sought safer haven.

In an interview with Reuters, U.S. Commerce Secretary Carlos Gutierrez said economic stimulus payments that are being sent out to qualifying Americans should bolster the economy but wouldn’t predict when more jobs would be created.

JOB PICTURE CLOUDED

“I won’t speculate,” he said. “But we are forecasting continued growth in the economy for the back half of the year and it will be that growth that will determine a return to job creation.”

But consumers, whose purchases fuel two-thirds of national output, appeared to be frightened by soaring energy and other costs and by tightening credit conditions.

Sales of new cars by General Motors Corp. plummeted 27 percent in July from year-earlier levels, Ford Motor Co. sales fell 15 percent and Toyota Motor Corp. was off 12 percent. GM lost a staggering $15.5 billion in the second quarter.

In St. Petersburg, Florida, Democratic presidential candidate Barack Obama called for new measures, including $25 billion of spending on infrastructure projects like roads.

“With job losses mounting, prices rising, increased turbulence in our financial system, a growing credit crunch, we need to do more,” Obama said at a town hall meeting.

The Labor Department trimmed estimates for job losses in both May and June. It said a total of 26,000 fewer jobs were lost in the two months than previously thought.

Policy-makers at the Federal Reserve meet next week and are expected to keep official interest rates unchanged as they weigh concerns about economic weakness against worries about bubbling price pressures.

Brian Gendreau, an investment strategist with ING Investment Management Americas in New York, described monthly job losses as “painful” and consistent with a weak economy.

“We are clearly in a growth recession and my fear is that we are in a mild, but longer recession than the one we experienced in 2001-2002,” Gendreau said.

A line of job seekers stretches out of a hotel doorway as they wait to enter a Monster.com job fair in Los Angeles, California July 23, 2008. REUTERS/Fred Prouser

HOUSING SLIDE CONTINUES

The unexpectedly steep climb in the unemployment rate underlines how a deterioration in the housing sector continues to chill economic growth. The last time the jobless rate was higher was in March 2004, when it hit 5.8 percent.

While July’s job loss was not as bad as feared, it did not change the picture of an economy that is basically treading water, analysts said.

“Overall the report looks to be broadly consistent with other data that show the economy quite soft, basically stalled, not growing very much, but not contracting very much either,” said David Resler, chief economist for Nomura Securities International in New York.

The report showed 16-to-24 year olds facing particular difficulty in trying to nail down summer jobs, a factor that helped push up the overall unemployment rate.

In addition, the average workweek slipped to 33.6 hours, the lowest since November 2004, from 33.7 hours in June, a further suggestion of economic weakness.

July job losses were widespread. The only major sectors showing any gains were government, hospitality, and education and health services. Construction industries shed another 22,000 employees and factories cut 35,000 jobs.

A Commerce Department report on June construction spending underlined the continuing slide in building that is dragging employment lower in the construction sector, with spending falling a steeper-than-expected 0.4 percent.

(Additional reporting by Burton Frierson and Chris Reese in New York, Patrick Rucker in Washington and John Whitesides in St. Petersburg; Editing by Neil Stempleman)