(Adds market reaction, detail)
* Employment rises 14,500 in Sept, vs forecasts of +3,750
* Jobless rate 5.4 pct, against 5.3 pct expected
* Aussie dollar rises a third of a cent after data
* Market still flagging another rate cut by Christmas
SYDNEY, Oct 11 (Reuters) - Australian employment rose bymore than expected in September but unemployment also jumped tothe highest in over two years as more people looked for work, amixed report that should not challenge market expectations formore cuts in interest rates.
The Australian dollar
rose a third of a cent aftergovernment data showed employment rose 14,500 in September,compared to forecasts for a slight rise of 3,750. Full-time jobsjumped by 32,100 in the month, while part-time employment fellby 17,700.
However, the jobless rate also surprised by increasing to5.4 percent from 5.1 percent in August and above forecasts of5.3 percent. That was the highest reading since April 2010.
Weakness in hiring was a major factor behind last week'sdecision by the Reserve Bank of Australia (RBA) to cut its cashrate by a quarter point to a three-year trough of 3.25 percent.
And it is one reason investors expect more easing to come.Interbank futures
imply rates at 3 percent by Christmaswith a better than even chance of a cut next month, butexpectations were scaled back somewhat after the data.
The jobless rate has been remarkably steady between 4.9 and5.4 percent for over two years now, even though employmentgrowth has been subdued.
However, that steady performance was partly due to anunusually large fall in the participation rate, which hasdropped a full percentage point since late 2010 to a five-yearlow of 65.0 percent in August.
RBA policymakers suspect the fall in participation means thelabour market is softer than implied by the jobless rate alone,allowing more scope for stimulus without the risk of ignitingwages or inflation.
(Reporting by Wayne Cole; Editing by John Mair)
Keywords: AUSTRALIA ECONOMY/