by Veronica Smith

WASHINGTON - The United States capped 2011 with a fall in the unemployment rate and a pick-up in hiring in December, but there were signs of risks to continued improvement this year.

In a keenly awaited reading of the ailing jobs market, the Labor Department on Friday reported the jobless rate fell to 8.5 percent and 200,000 jobs were added in December.

The jobless rate was the lowest since February 2009, when Congress passed a $787 billion stimulus bill the month after President Barack Obama took office amid the worst US recession in decades.

The rate has lost 0.6 percentage point since August, according to the Labor Department's year-end revisions.

"This is the best possible type of report, as job creation in December was strong and the unemployment rate fell," said Jason Schenker at Prestige Economics.

"This report provides further justification for continued modest optimism about the US economy in 2012," he said.

The report was stronger than generally expected. Analysts on average had predicted the jobless rate would instead rise, and weaker job gains of 150,000.

The number of unemployed people continued to trend down in December, to 13.1 million. Hourly wages and hours worked rose.

But the data showed the lingering deep strains in the labor market after the recession ended in June 2009.

Those counted as long-term unemployed -- persons without a job for 27 weeks or more -- barely budged at 5.6 million, or 42.5 percent of the unemployed.

Other indicators were flat, including the labor force participation rate, unchanged at 64 percent.

The private sector once again delivered the lion's share of job gains, adding 212,000 in December.

The job gains were broad-based, with jobs added in transportation and warehousing, retail trade, manufacturing, health care, and mining.

However, analysts pointed out that the 42,000 messenger jobs added during the holiday shopping season would likely disappear in January.

Governments at all levels shed a net 12,000 jobs, a slower pace of layoffs amid strained budgets.

Some analysts cautioned that big risks remained in the long, slow jobs recovery.

"Unfortunately, we need more like 300,000 jobs to get the unemployment rate coming down consistently and rapidly and that is not likely to happen this year," said Joel Naroff of Naroff Economic Advisors.

Naroff pointed to tensions with Iran over its nuclear problem and Europe's public debt crisis.

"While this is a good report, we need more of them and they need to get a lot better if the economy is to start expanding strongly," he added.

IHS Global Insight's Nigel Gault said that while the report was "encouraging," the economy still faces "domestic headwinds" from the legacy of household and government debt.

"But the major threat remains external from slowing growth in the rest of the world and from the eurozone's financial crisis," he added.

Ahead of the November presidential election, the better jobs picture was expected to boost Obama's reelection bid.

The Democratic president has backed government stimulus efforts to generate more jobs, while opposition Republicans argue that more government spending holds the private sector back and adds to the huge federal deficit.

The Obama administration hailed the jobs numbers as "further evidence that the economy is continuing to heal from the worst economic downturn since the Great Depression."

Alan Krueger, the chairman of the White House Council of Economic Advisers, urged Congress to pass measures to ensure the recovery continues.

"It is critical that we continue the economic policies that are helping us to dig our way out of the deep hole that was caused by the recession that began at the end of 2007," Krueger said in a White House blog post.