Updated from 8:56 a.m. EST

A sharp deterioration in the job market suggests the economy is still losing momentum and could prompt the

Federal Reserve

to cut rates again as soon as this month, economists said Friday.

"The worries over the war and the economic impact of it and general uncertainty is really having a broad-based impact on business behavior," said Geoffrey Somes, senior economist at FleetBoston. "It doesn't mean we're re-entering recession, because you need persistent contraction for that to occur, but certainly it's not a good sign."

The U.S. labor market took an unexpected dive in February, as the economy lost 308,000 jobs and the unemployment rate rose to 5.8% from 5.7% in the prior month. The number of jobs lost was the most of any month since November 2001. Economists were expecting the economy to add a few thousand jobs, while the rise in the unemployment rate was in line with forecasts.

Somes was concerned not just by the size of the decline but by the breadth of it. "We saw big drops in health care retail, transportation, utilities. It was across the board."

Although some economists attributed the large drop in payrolls to a snowstorm over the Presidents Day weekend, Somes said the employment survey was conducted before the blizzard. What could have contributed to the weakness somewhat, he conceded, was the fact that reservists left their jobs to report for military duty. Still, he said that factor "doesn't explain all the weakness in the numbers."

Steven Wieting, senior economist at Salomon Smith Barney, shares Somes' view. "Just about everything that could fall, did fall and the weather and reservists who were called up are probably only moderate explanatory factors and can't explain all of it."

Still, Weiting isn't convinced that the data truly reflect the current labor market. Although conditions are worsening, he doesn't believe they are as bad as Friday's report suggests. He noted that other labor market indicators have shown only modest weakness recently. "February was a very bad month for the economy but I don't think we suddenly plunged by 300,000 while

unemployment benefit claims had a slight increase over the month," he said.

Weiting also questioned the big increase in average hourly earnings in Friday's report. "I don't think everybody got a big pay raise in the month of February."

But J.P. Morgan senior economist James Glassman believes the data were weak enough to spark another interest rate cut by the Federal Reserve at the March meeting.

"The report has added to the perception that the economy may have lost momentum or isn't pulling out of the slowdown we saw in the fourth quarter," he said. "It makes me think that the Fed policy outlook is changing."

Glassman had previously thought the Fed would hold steady this year, keeping interest rates at a 40-year low of 1.25%. But he now believes the Fed will slice rates as soon as this month. Although the fed funds rate is already very low, he believes "the message from forceful actions would be very positive."

Fed funds futures now suggest that the central bank will cut rates to 1% by May. Prior to the jobs report, fed funds were pricing in a 22% chance of a quarter-point cut in March and a 75% chance of a cut in June. They are now factoring in a 40% chance of a cut in March and a 100% chance of a quarter point cut by June. Fed policymakers will meet on March 18, May 7 and June 26.

Glassman said the sharp rise in oil prices, along with weak consumer confidence, concerns about war and declines in the stock market, all suggest that the Fed might have to cut rates one more time.

Merrill Lynch chief economist David Rosenberg said the chances of a recession are now 50/50 and he believes the Fed will at least move to an easing bias in March, if it doesn't actually cut rates. "It was

a frighteningly weak

report, thereby raising the possibility of a double-dip recession," he said.

Meanwhile, calls for the resignation of Labor Secretary Elaine Chao grew Friday. Scott Rothbort, founder of LakeView Asset Management, contributor to

Street Insight

,

The Street.com's

sister site, and general supporter of the Bush administration, wrote: "What has she done to stimulate job creation and growth? Outside of her own staff, absolutely nothing. Is she falling under the radar screen of the administration? She must go!"

The jobs report Friday showed that the services industries shed 204,000 jobs, led by a 92,000-job plunge at retailers, while manufacturers cut 53,000 jobs. These kinds of declines in the service sector have not been seen since the 1973-75 recession, according to Rosenberg. The last time the economy shed 300,000 jobs without being in recession was in 1983.

The average workweek fell to 34.1 hours, with the manufacturing workweek was unchanged at 40.8 hours. Average hourly earnings rose 0.7%, in part reflecting a downward revision in the January figure. The duration of unemployment rose to 18.6 weeks, the highest in a decade.

The Labor Department revised December's job loss to 147,000 from the previously reported 156,000, while January's gain was raised to 185,000 from the previously reported 143,000.