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UPDATE 2-Australia employment gains, but jobless at 29-mth high

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* Employment rises 14,500 in Sept, vs forecasts of +3,750

* Jobless rate up at 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

(Adds analyst reaction, detail)

By Wayne Cole

SYDNEY, Oct 11 (Reuters) - Australia added more jobs thanexpected in September but the unemployment rate still jumped toa 29-month high as more people looked for work, a mixed reportthat should not challenge market expectations for more cuts ininterest rates.

The Australian dollar

rose a third of a cent aftergovernment data showed employment rose 14,500 in September, sobeating forecasts for only a 3,750 gain. Full-time jobs climbedby 32,100, the third straight month of gains.

However, the jobless rate still surprised by rising to 5.4percent from 5.1 percent in August and above forecasts of 5.3percent. That was the highest reading since April 2010 while the

number of people unemployed was the highest since late 2009.

"That's consistent with a reasonably soft labour market, andthe leads are pointing to further softness," said Su-Lin Ong, asenior economist at RBC Capital Markets.

"The unemployment rate is consistent with increasing slackin the labour market and further rate cuts. Whether it's nextmonth or December is debatable -- we are leaning to November."

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.

The jobless rate had been remarkably steady between 4.9 and5.3 percent for the past two years, even though employmentgrowth has been subdued.

However, that steady performance was partly due to anunusually large fall in the participation rate, which haddropped a full percentage point since late 2010 to a five-yearlow of 65.0 percent in August.

That trend reversed a little in September with theparticipation rate edging up to 65.2 percent. Analysts see scopefor a further increase ahead which would put upward pressure onthe jobless rate as well.

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Graphic of employment:Employment by industry:Unemployment:Global rates:

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LOOKING FOR JOBS

Despite the job gains in September, annual employment growthremained well below the historical trend at a pedestrian 0.5percent.

Traditional big employers such as retail and constructionhave been shedding jobs, while manufacturing has suffered undera high currency and intense competition.

Construction alone lost 70,000 jobs in the year to August,with housing particularly badly hit, and policy makers wouldclearly like to see some recovery in this sector.

"A pick-up in construction activity is one of the factorsthat could provide an offset to the eventual moderation in thecurrent very high level of investment in the resources sector,"RBA Deputy Governor Philip Lowe said this week.

The booming mining industry has been a big hirer, bothdirectly and through support services, though recent wild swingsin the price of iron ore threaten to cool things off.

BHP Billion

this week said it plans to shed anundisclosed number of jobs in iron ore as it battles weakerdemand and higher costs.

Still, healthcare continues to expand rapidly as thepopulation ages and is now the biggest single employer.

"The overall impression when we smooth all these trends outis it's still a pretty soft labour market overall," said MichaelBlythe, chief economist at Commonwealth Bank.

"The Reserve Bank still expects unemployment to rise," headded. "Given some of the global concerns that are still playingout the risks still point to lower rates. We think we'll seeanother move (down) in November."

(Reporting by Wayne Cole; Editing by John Mair)

((Wayne.Cole@thomsonreuters.com)(612 9373 1813)(ReutersMessaging: wayne.cole.thomsonreuters.com@reuters.net))

Keywords: AUSTRALIA ECONOMY/