NEW YORK (CNNMoney.com) - Hiring slumped in December though the economy created 2 million jobs for the second straight year, the government said Friday, in a reading that was mostly weaker than Wall Street had expected.

The economy created 108,000 jobs last month, compared with a revised gain of 305,000 jobs in November, the Labor Department reported. The December gain was the smallest of the year aside from September and October, when Hurricane Katrina slowed hiring.

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Economists surveyed by Briefing.com had forecast a gain of 200,000 jobs for December, which would have been roughly in line with the pace of 2005 job growth aside from the two months hurt by Katrina.

But the report also showed that the unemployment rate declined and wages increased a bit more than forecasts.

Also, the November payroll gain was revised up by 90,000 so taking the two months together, the number of Americans on payrolls at year-end was roughly in line with economists' forecasts going into this report.

The unemployment rate dipped to 4.9 percent from 5 percent rate in November. Economists had forecast the rate would hold steady.

The average hourly wage rose 0.3 percent in the month to $16.34. That's steeper than the 0.2 percent increase forecast by economists.

For the year, average wages rose 3.1 percent, the strongest performance since 2002, but still behind the 3.5 percent pace of inflation, as measured by the consumer price index, the government's main inflation gauge, for the 12 months through November.

The employment report is being watched even more closely than usual for clues about what the Federal Reserve will do with interest rates. The central bank reinforced earlier this week that it was nearing an end to its 18-month-old rate-hiking campaign.

Most economists expect one or two more rate hikes from the central bank, whose policy-makes next meet on Jan. 31. The Fed has raised rates 13 straight times starting in June 2004.

December's sluggish job growth is seen feeding the belief that the Fed will end its rate hikes soon.

But the revision to November job growth and the higher-than-expected wage growth could mean the Fed will raise rates at its meeting in March as well.

Anthony Chan, senior economist with JPMorgan Asset Management, said that he believes that overall the job report makes an end to rate hikes more likely.

"This report makes the Federal Reserve graceful exit from the policy arena a lot more palatable," he said. "It's difficult to argue that the Fed has much more heavy lifting left."

The Fed will see two more monthly employment reports before its March 28 meeting.

On Wall Street, stocks opened higher following the report but the gains were modest. Treasury bonds edged lower, pushing the yield on the 10-year note to 4.38 percent from 4.35 percent late Thursday. Bond prices and yields move in opposite directions.

For more on the Fed's latest signal about rate hikes, click here.

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