Updated from 9:42 a.m. EST

Growth in the U.S. labor market saw a significant deceleration last month, with nonfarm payrolls rising by just 110,000 -- about half the consensus forecast and well below the previous month's gain. Stocks and bonds initially rose on the news, then reversed after a separate gauge of the services economy showed unexpected strength.

The unemployment rate fell to 5.2% in March from 5.4% in February and currently stands at a three-and-a-half-year low. Average hourly earnings rose 0.3%.

Economists were expecting nonfarm payrolls to rise by 225,000, for the unemployment rate to fall to 5.3%, and for average earnings to rise by 0.2%.

The weak payroll print had an initially bullish impact on stocks, sending the

Dow

up 55 points in early trading, and lifted bonds, with the 10-year Treasury note going from flat to up 10/32 in price. The yield fell to 4.44% from 4.49%.

All of those gains reversed, however, after the Institute for Supply Management mistakenly released its non-manufacturing survey several days early. The index came in at 63.1, its best reading since December. Both the non-manufacturing survey and the ISM's national survey, which also came out Friday, showed fairly strong rises in their prices components.

Recently, the Dow was down 47 points, while the 10-year bond was down 9/32 to yield 4.52%.

"The market's reaction to the ISM number shows it has higher attention to the overt inflation indicators than to the less-subtle ones," said Michael Gregory, senior economist at Harriss Nesbitt. "We had 3% to 4% growth for the first quarter, which would keep the inflation pressures building. There is more inflationary pressures in the underlying of the payroll number than tbe ISM number, so I find the market's initial reaction a little puzzling."

The number of jobs created in February was revised down to 243,000 from 262,000. January payroll growth was reduced by 8,000 jobs to 124,000.

The March payroll miss was attributable to unexpected weakness in retail employment, which fell 10,000, and manufacturing employment, which lost 8,000 jobs. Business services payrolls rose by a weaker-than-expected 27,000 in March.

"We are very surprised by this number. It is not refelctive of what we see going on," said Eric Goodstadt, chief marketing officer at MRI Recruiting. "We believe this number will be revised up to the range of 150,000 to 160,000. We have new job opportunities arising every day in the finance, health care and pharmaceutical industries, and are having trouble filling many vacancies."

Overall, the service industry added 86,000 jobs, while construction employers added 26,000.

Friday's employment news will relieve inflation fears that have dominated the Wall Street debate for the last several weeks, particularly as oil has climbed back above $55 a barrel. The number would appear consistent with the last statement from the Federal Open Market Committee, which noted that "labor market conditions continue to improve gradually."

The same statement sparked the latest bout of price paranoia by saying: "Though longer-term inflation expectations remain well-contained, pressures on inflation have picked up in recent months, and pricing power is more evident."

The fall in the headline jobless rate, which is based on a different survey than the payroll number, suggested to some observers that underlying labor growth remains strong.

"On the surface, the number seems weak and is a little disappointing. But the drop in the unemployment rate tells a little different story," said Stuart Hoffman, chief economist at PNC Financial Group. "Keep in mind that we created almost 500,000 new jobs for the first quarter; this trend shows there is still strong job growth."