(Reuters) - Employment growth accelerated last month and the jobless rate dropped to a near three-year low of 8.5 percent, offering the strongest evidence yet the economic recovery was gaining steam.

Nonfarm payrolls increased 200,000 in December, the Labor Department said on Friday. It was the biggest rise in three months and way above economists' expectations for a 150,000 gain.

The unemployment rate dropped from a revised 8.7 percent in November to its lowest level since February 2009, a heartening sign for President Barack Obama whose re-election hopes could hinge on the state of the labor market.

"While positive, it's important to contain optimism about the outlook in the months ahead," said Jim Baird, chief investment strategist for Plante Moran Financial Advisors in Kalamazoo, Michigan. "The economy is still pushing forward, but many hurdles to further acceleration remain."

A string of better-than-expected U.S. economic data in recent weeks has highlighted a contrast between the recovery in the world's biggest economy and Europe, which is already widely believed to be in recession and probably faces worse to come.

Despite the stronger-than-expected jobs data, U.S. stocks opened down slightly. Prices for U.S. government debt initially fell but soon erased their losses, while a broad index of the dollar's value hit a one-year high.

Republican presidential hopefuls have blasted Obama's economic policies as doing more harm than good.

The latest economic signs, however, could offer the president some political protection. Over the course of last year, the economy added 1.6 million jobs, the most in five years.

Still, the United States has a long way to go to win back the jobs lost during the 2007-2009 recession. At December's pace of job growth, it would take about 2-1/2 years for employment to return to the where it stood before the downturn began.

FASTER JOB GROWTH PACE STILL NEEDED

Though the payrolls count for October and November was revised to show 8,000 fewer jobs created than previously reported, there is no denying the labor market is recovering.

The household survey, from which the jobless rate is derived, showed most of the drop in the jobless rate was due to gains in employment as the labor force shrank only modestly.

A broad measure of unemployment, which includes people who want to work but have stopped looking and those working only part time but who want more work, dropped to an almost three-year low of 15.2 percent from 15.6 percent in November.

All told, 23.7 million Americans are either out of work or underemployed.

With the labor market still far from healthy, the debt crisis in Europe unresolved and tensions overIran threatening to drive up oil prices, the U.S. economy faces stiff headwinds.

Economists predict the recovery will lose a step early this year after expanding in the fourth quarter at what is expected to be the fastest pace in 1-1/2 years.

This should keep alive the possibility of the Federal Reserve embarking on a third round of asset purchases to spur stronger growth, even though prospects of a further easing of monetary policy were damped by the jobs data.

GOVERNMENT A DRAG

All the job gains in December came from the private sector, where payrolls rose 212,000 - the most in three months. Government employment contracted 12,000.

For all of 2011, the private sector added 1.9 million jobs, while government employment fell 280,000.

A measure of the share of industries that showed job gains during the month rebounded after falling sharply in November.

There were job gains in construction, where unseasonably mild weather has boosted groundbreaking for new homes. Construction payrolls increased 17,000 after falling 12,000 in November.

Transportation and warehousing also got a boost from the mild temperatures, with employment jumping 50,200. The bulk of the rise came from the messenger industry, which added 42,000 jobs, probably reflecting an increase in deliveries of online purchases made during the holiday season.

Manufacturing jobs rose 23,000, the largest increase since July. Factory employment rose 225,000 last year.

Retail employment rose 27,900, slowing after hefty gains in November as retailers geared up for a busy holiday shopping season.

But temporary hiring - seen as a harbinger of future hiring - fell 7,500 in December after gaining 11,200.

Even though employment picked up last month, hourly earnings rose a modest four cents, indicating that most of the jobs being created are low paying.

This is a potentially troubling sign for consumer spending, which has been largely supported by a reduction in savings.

(Editing by Andrea Ricci)

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