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A huge jump in payroll jobs in May sent financial markets reeling today as investors feared that the Federal Re-serve will soon be forced to start raising interest rates to slow an overheated economy.

The Labor Department reported that payroll jobs surged by 348,000 last month, more than double what had been expected, led by strong gains in employment at temporary help firms and department stores.Despite the big payroll increase, the nation's unemployment rate crept up to 5.6 percent, compared with a 14-month low of 5.4 percent in April.

But financial markets focused on the surge in payroll jobs. Stock and bond prices both plunged.

The Dow Jones industrial average was down 65 points in the first 30 minutes of trading while falling demand pushed the yield on Treasury's benchmark 30-year bond up to 7.08 percent.

President Clinton, speaking to reporters in the White House Rose Garden, sought to highlight the big jump in job growth while playing down worries about inflation.

"Today we have been given fresh evidence that the American economy is growing, steady and strong," Clinton said. "As the market has a chance to go through this day and the days ahead, there is no evidence of inflation in today's economy."

But private economists said investors were right to worry that the Federal Reserve would soon increase interest rates.

"The soft landing is over and now we are in a takeoff that is turning out to be more rapid than expected," said Robert Dederick, chief economic consultant at Northern Trust Co. in Chicago.

Dederick said the Fed could raise rates as soon as its July 2-3 meeting.

"This is a group that prides itself on being pre-emptive and keeping inflation in check," he said. "The only thing that might deter them until August is a desire to wait for more data to see if this initial bounce will slow to a more moderate pace."

The 0.2 percentage point increase in the jobless rate occurred because the labor market swelled by 549,000 in May, but only 367,000 of those job seekers found employment, according to a survey of the nation's households.

The separate survey of businesses showed that non-farm employment rose by 348,000 in May. This was far higher than the forecast of many economists for a gain of about 150,000 and represented the sharpest jump since an increase of 509,000 in February.

In addition, the government revised sharply higher the payroll growth in April to an increase of 163,000, compared to an estimate a month ago of a tiny gain of 2,000.

For May, 52 percent of the increase in payroll jobs came from a gain of 181,000 workers in service industries. This strength was led by employment in temporary help firms, which rose by 48,000.

Also contributing to the big rise in service industries was a gain of 46,000 jobs at retail establishments, with most of that strength coming in department stores.

Employment in manufacturing was up a tiny 6,000, but this rebound came after a job loss of 282,000 from March of last year through April. Construction jobs were up a sharp 28,000 in May.

The Federal Reserve cut interest rates three times from July of last year through January of this year as policymakers worried that a sluggish economy might push the country into a recession.