The US economy created jobs at a steady pace last month as the unemployment rate eased to 4.5 per cent, according to fresh government figures that soothed market fears about a recession.

Investors dramatically scaled back expectations of interest rate cuts as employers added 97,000 workers to their payrolls last month and the US labour department said 55,000 more jobs than previously thought were created during December and January.

The moderate pace of job creation helped ease investor concerns about a sudden economic slowdown after Alan Greenspan, former chairman of the Federal Reserve, said this week that there was a one-third probability of a recession.

Mr Greenspan's comments are starkly at odds with the relatively upbeat outlook of Ben Bernanke, his successor.

Stephen Pope, an analyst at Cantor Fitzgerald, said: "These latest numbers pack a punch behind the view of Ben Bernanke and support a good aspect for the US economy. My opinion is that we have to stand by Ben and say 'goodbye Greenspan'."

Government bonds were sold off and stocks drifted higher as investor confidence continued to bounce back. The S&P 500 was three points higher at 1,404.66 late yesterday morning in New York, although this was still 3 per cent below its level last Monday, the day before Chinese stock markets sparked a global sell-off.

The yen weakened, extending the recent inverse relationship between the Japanese currency and US stock markets.

However, lingering worries about sub-prime lenders kept a lid on Wall Street's enthusiasm.

The dollar also got a lift from the latest trade gap data. Yesterday, the government said the US international trade deficit narrowed much more than expected in January to $59.1 billion (€45.07 billion), after a record trade deficit in 2006.

Gold prices fell as the dollar climbed, while oil prices declined on some profit-taking after recent gains.

"It's certainly better than the market's worst fears and stronger than the whisper numbers beforehand," said Alan Ruskin, chief international strategist at RBS Greenwich in Connecticut.

Yesterday evening the Dow Jones Industrial average was up 15.62 points, or 0.13 per cent, at 12,276.32. The Standard & Poor's 500 index was up 0.96 points, or 0.07 per cent, at 1,402.85 and the Nasdaq composite index was down 0.18 points, 0.01 per cent, at 2,387.55. Europe's FTSE Eurofirst 300 reversed losses of more than half a per cent to rise 0.23 per cent and end at 1,489.47.

In Tokyo, the Nikkei index gained 0.43 per cent to close at 17,164.04. Machinery stocks such as Fanuc rose on upbeat machine orders data, while a weak yen lifted shares of Canon and other exporters.