(Adds details from report, market reaction, analyst and Trump comments)
* Nonfarm payrolls increase by 209,000 in July
* Unemployment rate falls to 4.3 percent
* Average hourly earnings increase 0.3 percent
WASHINGTON, Aug 4 (Reuters) - U.S. employers hired more workers than expected in July and raised their wages, signs of labor market tightness that likely clears the way for the Federal Reserve to announce a plan to start shrinking its massive bond portfolio.
The Labor Department said that nonfarm payrolls increased by 209,000 jobs last month amid broad-based gains. June's employment gain was revised up to 231,000 from the previously reported 222,000.
Average hourly earnings increased nine cents, or 0.3 percent, in July after rising 0.2 percent in June. That was the biggest increase in five months. On a year-on-year basis, wages increased 2.5 percent for the fourth straight month.
"It was strong across the board. It puts (the Fed) still on track to start the program to wind down the book in September and it's a long ways off in December for the next rate hike," said Justin Lederer, an interest rate strategist at Cantor Fitzgerald in New York.
Lack of strong wage growth is surprising given that the economy is near full employment, but July's monthly increase in earnings could offer some assurance to Fed officials that inflation will gradually rise to its 2 percent target.
Economists expect the Fed will announce a plan to start reducing its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities at its next policy meeting in September. The Fed bought these securities to lower interest rates in the wake of the 2007-2009 financial crisis.
Sluggish wage growth and the accompanying benign inflation, however, suggest the U.S. central bank will delay raising interest rates again until December. The Fed has raised rates twice this year and its benchmark overnight lending rate is in a range of 1 percent to 1.25 percent.
Prices of U.S. government debt fell after the data while U.S. stock index futures added to gains. The dollar rose sharply against a basket of currencies.
Economists polled by Reuters had forecast payrolls increasing by 183,000 jobs in July and wages rising 0.3 percent.
Wage growth is crucial to sustaining the economic expansion after output increased at a 2.6 percent annual rate in the second quarter, an acceleration from the January-March period's pedestrian 1.2 percent pace.
The unemployment rate dropped one-tenth of a percentage point to 4.3 percent in July, matching a 16-year low touched in May. It has declined four-tenths of a percentage point this year and is now at the most recent Fed median forecast for 2017.
July's decline in the jobless rate came even as more people entered the labor force, underscoring job market strength.
LABOR FORCE RISES
The labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, rose one-tenth of a percentage point to 62.9 percent.
Still, some slack remains in the labor market. A broad measure of unemployment, which includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment, was unchanged at 8.6 percent last month. This alternative measure of unemployment hit a 9-1/2-year low in May.
July's employment gains exceeded the monthly average of 184,000 for this year. The economy needs to create 75,000 to 100,000 jobs per month to keep up with growth in the working-age population.
Republican President Donald Trump, who inherited a strong job market from the Obama administration, cheered Friday's strong employment. "Excellent Jobs Numbers just released - and I have only just begun," Trump said on Twitter. "Many job stifling regulations continue to fall. Movement back to USA!"
Trump has pledged to sharply boost economic growth and further strengthen the labor market by slashing taxes, cutting regulation and boosting infrastructure spending.
But after six months in office, the Trump administration has failed to pass any economic legislation and has yet to articulate plans for any tax cuts and infrastructure spending as well as most of its planned regulatory rollbacks.
The composition of the job gains in July mirrored June's. Manufacturing payrolls increased by 16,000 jobs, the largest increase since February. Employment in the automobile sector rose by 1,600 despite slowing sales and bloated inventories that have forced manufacturers to cut back on production.
U.S. auto sales fell 6.1 percent in July from a year ago to a seasonally adjusted rate of 16.73 million units. General Motors Co and Ford Motor Co have both said they will cut production in the second half of the year.
Construction firms hired 6,000 workers last month. Hiring at homebuilding sites increased 5,100 last month. The professional and business services sector added 49,000 workers to its payrolls last month.
Retail payrolls rose by 900 in July as hiring at motor vehicle and parts dealerships as well as online retailers offset a drop of 10,000 in employment at clothing stores.
Companies like major online retailer Amazon are creating jobs at warehouses and distribution centers. Amazon this week held a series of job fairs to hire about 50,000 workers.
Government payrolls gained 4,000 in July. (Reporting by Lucia Mutikani; Additional reporting by Karen Brettell in New York; Editing by James Dalgleish and Paul Simao)