American jobs have fallen for the first time in four years as the crisis in the nation's housing market and the looming threat of a global credit crunch sparked layoffs.

The Labor Department said US employers unexpectedly shed 4,000 jobs in August, the first drop in payrolls since August 2003. The Dow Jones Industrial Average fell by 205 points to 13,157.90 as the early morning market digested the surprise figures while the FTSE 100 index declined by 107.7 points to 6,205.6.

The figures bolstered expectations that the Federal Reserve will slash US interest rates later this month in a bid to support the world's largest economy as it shows signs of faltering.

The jobs data followed bearish comments from Alan Greenspan in which the former head of the Federal Reserve likened the current market turmoil to the environment surrounding the stock market crash of 1987 and the 1998 crisis sparked by the collapse of hedge fund, Long Term Capital Management.

Mr Greenspan said: "The behaviour in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998, what we saw in the stock-market crash of 1987, I suspect what we saw in the land-boom collapse of 1837 and certainly [the bank panic of] 1907.”

The drop in non-farm payrolls caught Wall Street off-guard. Economists had been calling for around 110,000 new jobs to be created in August, but instead emploment fell by 4,000.

The job report, viewed as one of the best indicators of economic momentum, suggests the US employment market has been jolted by a housing slump and rising mortgage defaults which have triggered a credit squeeze that has roiled financial markets.

The national unemployment rate held steady at 4.6 per cent.

The report was released as the US central bank prepares to meet on September 18 to mull US interest rates amid increased scrutiny.

Calls are mounting for the Federal Reserve to cut borrowing costs. Its key federal funds rate has been anchored at 5.25 per cent since June 2006.

“Today’s employment report and the revisions are enough to justify several interest rate cuts by the Federal Open Market Committee,” said David Kotok, chairman and chief executive officer at Cumberland Advisors.

Ian Morris, chief US economist at HSBC North America in New York, said: “The numbers were obviously pretty weak. So I think in the context of what is going on in money markets, it solidifies our expectation of a 50 basis point cut by the Fed on September 18.”

Mr Greenspan made his comment on Thursday at an event in Washington organised by the Brookings Papers on Economic Activity, the academic journal, Dow Jones reported.

Hedge fund Long-Term Capital Management controlled $100 billion of assets in 1998 when it collapsed in the wake of a Russian debt crisis, wreaking havoc in markets across the world.

Mr Greenspan, who led the Fed from 1987 to 2005 and is now a private consultant, suggested that the markets remain vulnerable in the wake of the current crisis in the US sub-prime mortgage market, despite past experiences.

“The human race has never found a way to confront bubbles,” he said, suggesting that the manipulation of interest rates offers little control to central bankers.

“Bubbles cannot be defused until the fever breaks.”

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