Wall Street's hopes for upbeat employment news were dashed on Friday morning when the Labor Department reported that U.S. employment shrank for the first time in more than four years.

The report on January employment showed that employers pulled back sharply, cutting jobs in the face of rising costs and a slowing economy.

Employers slashed 17,000 jobs last month, while median forecasts were for hiring to grow by 80,000 jobs. It was the first drop since August 2003, when payrolls slid by 42,000. Job growth was upwardly revised to 82,000 from an originally reported 18,000 in December.

Steep losses in construction and manufacturing jobs continued, offsetting gains in health care, food services, and retail trade, the Labor Department reported. Employment in professional and technical services and financial services remained little changed.

The unemployment rate, which was at 4.5 percent a year ago, is now 4.9 percent, down from 5 percent in December. Average hourly earnings rose by 4 cents, or 0.2 percent.

The unexpectedly gloomy data will mean yet another big challenge for the Federal Reserve, which is trying desperately to combat weakness in the credit markets while at the same time encourage growth and stifle inflation. The Fed has cut the benchmark interest rate a total of 1.25 percent in the past weeks, from 4.25 percent to 3 percent.