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

* 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 than expected in September but the unemployment rate still jumped to a 29-month high as more people looked for work, a mixed report that should not challenge market expectations for more cuts in interest rates.

The Australian dollar

rose a third of a cent after government data showed employment rose 14,500 in September, so beating forecasts for only a 3,750 gain. Full-time jobs climbed by 32,100, the third straight month of gains.

However, the jobless rate still surprised by rising to 5.4 percent from 5.1 percent in August and above forecasts of 5.3 percent. 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, and the leads are pointing to further softness," said Su-Lin Ong, a senior economist at RBC Capital Markets.

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

Weakness in hiring was a major factor behind last week's decision by the Reserve Bank of Australia (RBA) to cut its cash rate 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 Christmas with a better-than-even chance of a cut next month.

The jobless rate had been remarkably steady between 4.9 and 5.3 percent for the past two years, even though employment growth has been subdued.

However, that steady performance was partly due to an unusually large fall in the participation rate, which had dropped a full percentage point since late 2010 to a five-year low of 65.0 percent in August.

That trend reversed a little in September with the participation rate edging up to 65.2 percent. Analysts see scope for a further increase ahead which would put upward pressure on the 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 growth remained well below the historical trend at a pedestrian 0.5 percent.

Traditional big employers such as retail and construction have been shedding jobs, while manufacturing has suffered under a high currency and intense competition.

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

"A pick-up in construction activity is one of the factors that could provide an offset to the eventual moderation in the current 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, both directly and through support services, though recent wild swings in the price of iron ore threaten to cool things off.

BHP Billion

this week said it plans to shed an undisclosed number of jobs in iron ore as it battles weaker demand and higher costs.

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

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

"The Reserve Bank still expects unemployment to rise," he added. "Given some of the global concerns that are still playing out the risks still point to lower rates. We think we'll see another move (down) in November."

(Reporting by Wayne Cole; Editing by John Mair)

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

Keywords: AUSTRALIA ECONOMY/