Updated from 8:46 a.m. EST

The U.S. economy added a much better-than-expected 337,000 jobs in October, the Labor Department said, setting the stage for a third day of major gains in the stock market. The number of jobs added in August and September was also revised upward by 156,000, suggesting employers have been less tentative than previously believed when it comes to business expansion.

The October unemployment rate rose one-tenth of a percentage point to 5.5%, while average hourly earnings rose by 5 cents. Economists had been forecasting payroll growth of 175,000, reflecting a bounce after September's hurricane-depressed results, and for the unemployment rate to have held at 5.4%.

Stock futures surged on the news, with the

S&P 500

going from roughly flat to up 7 points. Futures on the Nasdaq 100 were pointing to a 17-point pop at the open. Bonds, conversely, were hammered, as traders turned aggressively defensive ahead of next week's

Federal Reserve

meeting. The 10-year Treasury note went from flat to down 1 3/32 in a matter of minutes, pushing the yield up to 4.21%.

October's payroll growth was the most since March and followed disappointing results in each month since June. It came amid soaring oil prices, suggesting that the momentum for economic expansion is great enough to withstand two more interest rate hikes before the end of the year. The Fed meets again in December.

Among sectors, construction employment grew by 71,000 last month, reflecting increased activity in the Southeast, where four hurricanes battered coastlines over August and September. The services sector added a whopping 272,000 jobs in October, its best showing in eight months. The manufacturing sector continued to struggle, however, losing 5,000 jobs in the month.

Within services, the professional and business-services industry added 97,000 jobs. The category comprises most temporary workers.

Friday's numbers bring payroll growth for all of 2004 to about 2 million jobs, after a loss of 2.3 million in the first three years of the Bush administration.