NEW YORK (CNN/Money) - U.S. employers added the fewest jobs to payrolls in nearly two years in May, according to a government report Friday that showed the nation's labor market to be far weaker than Wall Street predicted.

The report fed growing expectations among many Wall Street traders this week that the Federal Reserve might soon pause or halt its course of regular interest rate hikes. That expectation sent bond prices higher and yields on Treasuries, which move in the opposite direction, to a 14-month low.

But unlike earlier this week when lower interest rates fueled a rally in equities, stocks moved lower in early trading due partly to growing concerns about the strength of the economy.

The Labor Department report showed employers added 78,000 jobs in May, down sharply from the 274,000 jobs added to payrolls in April. It was the smallest monthly jobs growth since August 2003, when only 2,000 jobs were added, according to revised figures from the Labor Department.

Economists surveyed by Briefing.com had forecast 175,000 new jobs, while those polled by Reuters were looking for a 185,000 job gain, with a range of estimates from 145,000 to 240,000.

Still, there were some signs of labor market strength in the weak report. The unemployment rate fell to 5.1 percent. The economists had looked for the unemployment rate to stay at the 5.2 percent level seen in April. The unemployment rate is based on a survey of households, which economists believe is less reliable than an employer survey that determines the payroll gain.

And some economists point out that the economy has added an average of 175,500 jobs a month over the past six months, up almost 14 percent from the average growth the previous six months.

U.S. Labor Secretary Elaine Chao characterized the report as a show of strength for the labor market.

"Today's numbers show the economy is continuing its 2-year solid streak of job creation, for a total of 3.5 million new jobs created since May 2003," she said in a statement.

But some economists said they see it as another sign that the economy is slowing down, as some other economic reports recently have suggested. They say that if the markets keep taking long-term rates down, while the Fed raises short-term rates, it will put a squeeze on lenders that often leads to slower economic growth.

"I think 78,000 is too few jobs to qualify as a soft landing," said Mark Vitner, senior economist for Wachovia Securities. Still he said that he was encouraged by the household survey results as well as the six-month average job gain.

Vitner said the employment report is weak enough that the Fed could leave rates unchanged as soon as its next meeting, which concludes June 30, although he believes another quarter-percentage point rate hike then is more likely. He said the inflation reports due later this month on wholesale and retail prices, if they show declines, could tip the Fed to pause sooner rather than later.

But Greg Valliere of Stanford Washington Research Group thinks that the growing speculation that the Fed may be near the end of its rate hikes is premature. He said there are too many concerns within the Fed about the possibility of a housing bubble and about rises in unit labor costs to allow it to leave the short-term Fed Funds rates at or near the current 3.0 percent level.

"I think the markets are being unrealistic right now. The market view on what the Fed is going to do is not shared within the Fed," he said.

But another economist said that the report does not have any inflationary signs that will give ammunition to inflation hawks at the Fed.

"This is clearly a non-threatening report for investors and policy makers alike," said Anthony Chan, senior economist for JPMorgan Asset Management. "Labor market conditions appear to be tepid enough to justify less rather than more Fed rate hikes while wage pressures did not spoil the party."

Two other closely watched numbers -- wages and average work week -- hit forecasts. Average hourly wages increased 3 cents, or 0.2 percent, to $16.03, while the work week was 33.8 hours, unchanged from an April number that revised down from 33.9. The average weekly wage showed a bigger gain, rising $5.48, or 1.0 percent, to $543.42.

Both wage measures have shown smaller gains over the last year than have consumer prices. Hourly wages are up 2.6 percent in the last 12 months, while weekly wages are up 2.3 percent, despite some strong gains recently. The consumer price index for April showed prices up 3.5 percent overall.

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