* Employment rises by 171,000 jobs in October
* Gains for two prior months revised higher
* Jobless rate ticks up to 7.9 percent as more hunt for jobs
* Last major economic report card before Nov. 6 election
WASHINGTON, Nov 2 (Reuters) - U.S. employers stepped up hiring in October and a small increase in the jobless rate was due to more workers restarting their job hunts, a hopeful sign for a lackluster economy that has been a drag on President Barack Obama's re-election bid.
Employers added 171,000 people to their payrolls last month, the Labor Department said on Friday. The government also said 84,000 more jobs were created in August and September than previously estimated.
The jobless rate edged up a tenth of a point to 7.9 percent, but that was due to workers surging back into the labor force. Only people who are looking for a job count as unemployed.
``This report is consistent with the emerging picture of an economic recovery that is continuing to regain traction after grinding to a halt earlier this year,'' said Millan Mulraine, an economist at TD Securities in New York.
The stronger-than-expected data was the last major report card on the economy before Tuesday's presidential election. Polls show Obama and Republican Mitt Romney locked in a dead heat in a race in which the nation's feeble jobs market has been front and center.
Romney cast the elevated jobless rate as a signal of the economy's ills. ``The economy is at a virtual standstill,'' he said in a statement. His top economic adviser, Glenn Hubbard, said a jobs growth figure closer to 300,000 would be needed to show an economy with real vigor.
Obama said the report showed the economy moving in the right direction. ``We have made real progress,'' he told a rally in Hilliard, Ohio.
Despite the political wrangling, the impact of the report on the election could be muted as most voters' perceptions on the economy are likely mostly fixed by now. However, the jobs report could make it more difficult for Romney to drive his message home.
While the rise in the jobless rate was expected, the increase in payrolls beat even the most optimistic forecast in a Reuters poll. U.S. stocks opened higher but then turned down, while the dollar strengthened and prices were mixed for long-dated U.S. government debt.
GLASS HALF FULL OR HALF EMPTY?
A full recovery from the 2007-09 recession remains distant and even sustained monthly job gains of 171,000 would bring down the unemployment rate only slowly. The jobless rate, which peaked during the recession at 10 percent, remains about 3 percentage points above its pre-recession level.
The persistently high unemployment rate has undercut wage growth. Average hourly earnings for production and non-supervisory employees fell one cent last month to $19.79, and were up just 1.1 percent in the year through October, the smallest rise since at least 1964.
Weakness in the labor market makes it unlikely the Federal Reserve will lose its resolve to keep easy money policies in place until the economy shows more vigor.
``We have substantial scope to use monetary policy to stimulate the economy,'' San Francisco Fed Bank President John Williams told a group of community leaders in Salt Lake City.
In October, the jobless rate rose because 578,000 people entered the workforce. Many of them got jobs, and a gauge of the proportion of working age Americans who have a job hit a three-year high at 58.8 percent.
The rise in the jobless rate was too small to reverse a big drop registered in September. A broader measure of underemployment that includes the unemployed, people who can only get part-time work and people who want a job but who are not looking ticked down a tenth of a point to 14.6 percent, its lowest level since April. Still, 23 million Americans were underemployed by this measure.
All of the gain in payrolls was in the private sector, which added 184,000 jobs in October, the biggest increase since February. The government shed 13,000 positions.
Private service-providing jobs were up 163,000, with retail trade adding 36,400 jobs. Temporary help services, often a harbinger of future full-time hiring, added 13,600 jobs, more than reversing the previous month's decline.
The construction sector saw a 17,000 increase in jobs, the largest rise since January, while factories added 13,000 workers, snapping two straight months of decline.
While consumers have picked up spending in recent months and the housing sector has stirred back to life, the U.S. economy faces a real threat of a renewed recession next year.
Without action by lawmakers, taxes will rise and government spending will fall to the tune of about $600 billion. That ``fiscal cliff'' could easily cause the economy to contract.
Europe's debt crisis, which has hit factories around the world, is also weighing on the U.S. recovery. A severe storm that hit the U.S. East Coast early this week could briefly drag on growth.
Given the uncertain outlook, businesses have been hesitant to invest. A separate report on Friday showed orders for non-defense capital goods, excluding aircraft, rose just 0.2 percent in September after a similarly tepid 0.3 percent gain in August.
Still, overall orders received by U.S. factories bounced back 4.8 percent, nearly reversing all of a deep slide seen in August.