By Lucia Mutikani

WASHINGTON (Reuters) - U.S. job growth unexpectedly accelerated in October as employers shrugged off a partial government shutdown, suggesting the economy was on firm footing and raising the prospect the Federal Reserve may soon decide to temper its bond-buying stimulus.

Employers added 204,000 new jobs to their payrolls last month, and 60,000 more jobs were created in September and August than previously reported, the Labor Department said on Friday.

The unemployment rate, however, edged up to 7.3 percent from September's nearly five-year low as federal workers were idled. Economists expect a reversal in coming months.

The sturdy gain in payrolls beat economists' forecasts for only 125,000 new jobs and joined data on the factory and services sectors in suggesting the economy weathered Washington's budget standoff far better than initially feared.

"This is an important development that increases the chance that the economy's momentum may have survived nearly intact," said Scott Anderson, chief economist at Bank of the West in San Francisco.

The report gave U.S. stocks a lift even as investors braced for the possibility of less Fed stimulus. The Standard & Poor's 500 index ended higher for a fifth straight week.

The dollar neared a two-month high against a basket of currencies, and U.S. Treasury debt prices fell.

Ahead of the jobs data, most economists said the central bank would wait until its meeting in March to curtail its bond-buying program. Some now say it would be unwise to rule out a move as soon as the Fed's next meeting in December.

"This report is significant enough to increase the probability of a December taper if November's economic data show a continuation of this trend," said Doug Handler, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

A Reuters poll of big bond dealers conducted after the jobs figures were released found that more now expect the central bank to begin dialing back its bond purchases before March, compared with a similar survey last month.

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STILL SOME CLOUDS OVER ECONOMY

October's job gains pushed them above the 190,000 monthly average for the past 12 months, a sign of labor market strength.

The economy, however, may not yet be out of the woods.

A separate report showed an unexpected drop in the Thomson Reuters/University of Michigan's preliminary consumer sentiment index for November, which came close to a two-year low.

In a third report, the Commerce Department said inflation, excluding food and energy, rose 1.2 percent in September from a year ago, well below the Fed's 2 percent target. Economists said that could make the central bank less inclined to slow its $85 billion per month bond purchase pace anytime soon.

In addition, the fiscal outlook remains uncertain, with a deal still to be hammered out on government funding and the nation's debt limit before current arrangements expire early next year.

"Until we get past the next fiscal deadline, I would say it's too early for the Fed to consider anything," said John Silvia, chief economist at Wells Fargo Securities in Charlotte, North Carolina.

The employment report also showed a surprisingly large number of Americans dropped out the labor force, pushing the participation rate to a 35-1/2-year low of 62.8 percent.

The 0.4 percentage point drop in the participation rate, was the largest since December 2009.

The department said there had been no "discernible" impact on its payroll figures from the 16-day government shutdown, adding that it had received an above-average response rate in its survey of employers.

The survey of households from which the unemployment rate is derived, however, was affected.

Furloughed federal workers were considered as employed in the payroll figures because they received back pay, but as unemployed in the household survey. That helped fuel an unusually large decline in the household survey's measure of employment, and it pushed the jobless rate higher.

Drew Matus, an economist at UBS in New York, said that without the distortions from the 16-day shutdown, the jobless rate would have dropped to 7.0 percent in October and the labor force participation rate would have held close to 63.2 percent.

The better-than expected payrolls count is unlikely to change expectations of slower economic growth in the fourth quarter, given that consumer spending slackened and business inventories rose in the July-September period.

The private sector accounted for all the job gains last month, with increases across all industries. Government payrolls fell 8,000.

The leisure and hospitality industry added 53,000 new jobs, the most since April, while professional and business services added 44,000 new positions. Payrolls in the retail sector increased 44,400 last month.

Manufacturing employment rose 19,000, the most since February. There were also gains in construction, where payrolls rose 11,000.

The average work week held steady at 34.4 hours. Hourly earnings gained two cents and have risen 2.2 percent over the past 12 months.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci, Tim Ahmann and Dan Grebler)