Stocks slump on jobs report

NEW YORK (CNNMoney.com) -- Stocks slumped and bonds surged Friday morning after the government reported a surprise decline in August payrolls, the first drop in four years.

The Dow Jones industrial average (down 162.26 to 13,201.09, Charts) lost close to 200 points or around 1.5 percent over an hour into the session. The broader S&P 500 (down 17.73 to 1,460.82, Charts) index lost 1.5 percent. The tech-fueled Nasdaq Composite (down 37.18 to 2,577.14, Charts) retreated 1.7 percent.

Employers reported that payrolls fell by 4,000 in August, when Wall Street economists were expecting payrolls to grow by 110,000, according to Briefing.com estimates. June and July job growth figures were revised lower.

The unemployment rate, generated by a separate survey, held steady at 4.6 percent, as expected.

The surprisingly weak report would seem to confirm that the Federal Reserve will cut a key short-term interest rate when it meets Sept. 18, a matter that has been in debate over the last few weeks as investors mulled the credit crisis versus signs of a still-strong economy.

Treasury prices surged in a classic "flight to quality" move that also signals that Wall Street expects the Fed to cut interest rates. The rally lowered the yield on the 10-year note to 4.42 percent from 4.50 percent late Thursday. Bond prices and yields move in opposite directions.

In currency trading, the dollar fell versus the euro and the yen.

U.S. light crude oil for October delivery fell 19 cents to $76.11 a barrel on the New York Mercantile Exchange.