* Nonfarm payrolls fall 95,000 in September
* Cash-strapped local governments still losing jobs
* Private employers adds 64,000 jobs, below forecast
* Unemployment rate unchanged at 9.6 pct
* Data supports views Fed will ease policy next month
(Adds details, updates markets)
By Lucia Mutikani
WASHINGTON, Oct 8 (Reuters) - The U.S. economy shed jobs in September for a fourth straight month as government payrolls fell and private hiring slowed, hardening expectations for more stimulus from the Federal Reserve to spur the recovery.
Nonfarm payrolls dropped 95,000, the Labor Department said on Friday, pulled down by the end of temporary jobs for the U.S. Census and steep losses at struggling local governments.
Private employment, a better gauge of the labor market, rose 64,000 after a 93,000 gain in August, below levels that would suggest a self-sustaining recovery from the recession.
The employment report was the last before the Nov. 2 mid-term Congressional elections and was a blow for President Barack Obama's Democratic Party, trailing in opinion polls.
The unemployment rate was unchanged at 9.6 percent.
Analysts said it was now almost certain that the Fed would announce a second program of asset purchases next month, even though there appeared to be no consensus among policymakers.
"I think the Fed is going to act in November, they need to press harder on the accelerator. The outlook for 2011 is weakening because the labor market is struggling to gather any momentum at all," said Ryan Sweet, a senior economist at Moody's Economy.com on West Chester, Pennsylvania.
Financial markets had expected overall payrolls would be unchanged, with private-sector hiring gaining 75,000.
U.S. stocks were little changed. Prices for government debt rose on the growing conviction the Fed would inject more money into the economy at its Nov. 2-3 meeting. The U.S. dollar fell to a 15-month low against the yen.
The U.S. central bank cut overnight interest rates to near zero in December 2008 and has already pumped $1.7 trillion into the economy by buying mortgage-related securities and government bonds.
Friday's data came as top finance officials from around the world gathered for International Monetary Fund meetings in Washington, where the plunging dollar and soaring emerging market currencies are top of the agenda.
TOUGH CALL
While financial markets appear to have priced in further monetary easing next month, some Fed officials are not so sure. St. Louis Fed President James Bullard told CNBC television that policymakers could wait until December if they felt the need for greater clarity on the outlook.
"This upcoming FOMC meeting is going to be a tough call, because the economy has slowed but it hasn't slowed so much that it's an obvious case to do something," Bullard said.
The recovery from the longest and deepest downturn since the 1930s has slowed, but neither Fed officials nor many economists say a new downturn is likely.
The government revised data for July and August to show 15,000 more jobs were lost than previously reported.
It also said its preliminary benchmark revision estimate indicated employment in the 12 months to March had been overstated by 366,000.
The end of 77,000 temporary Census jobs and the loss of 76,000 local government jobs pushed total government payrolls down 159,000 last month, weighing on the headline number.
White House economic adviser Austan Goolsbee said the economy must grow faster to generate more jobs and a recently approved $30 billion aid package for small business lending would do just that.
But Republicans, who are tipped to take control of the U.S. House of Representatives following November elections, said the government's policies had created a climate of uncertainty for businesses.
Private hiring last month was held back by goods-producing industries, where payrolls contracted 22,000 as manufacturing employment fell 6,000 after declining 28,000 in August.
Construction payrolls fell 21,000, reflecting lasting troubles in the housing market. The number had risen in August after the return of striking workers.
Private services sector employment rose 86,000 after increasing 83,000 in August. Temporary help services -- seen as a harbinger of permanent hiring - increased 16,900 last month after rising 17,700 in August.
"Employers are cautious about hiring and are testing waters before taking on full-time employees," said Sung Won Sohn, an economics professor at California State University in the Channel Islands.
"Future employment gains won't be robust and the jobless rate will fall only slowly because businesses are more cautious about hiring at this stage of economic recovery compared to previous episodes."
The length of the average workweek was unchanged at 34.2 hours for a third straight month.