NEW YORK — A dour report on job losses in June sent stocks sharply lower Thursday.

Major stock indexes were down about 2 percent after the U.S. unemployment rate hit a 26-year high. European markets were also down following similarly disappointing data on unemployment in the 16 countries that use the euro currency.

Recession-weary employers in the U.S. slashed 467,000 jobs in June, the Labor Department reported, far worse than the 363,000 that economists expected and a grim signal that the path to recovery will be bumpy. The jobless rate rose to 9.5 percent from 9.4 percent in May.

The report — one of the most closely watched economic indicators — disappointed investors who had become encouraged by positive signs recently that key areas of the economy including housing and manufacturing were showing modest signs of improvement.

The stock market rallied furiously this spring off of 12-year lows beginning in early March on hopes for a recovery, but the upward momentum stalled in mid-June as doubts began to emerge about whether the economy had really found a bottom. The June job report was the latest blow to the market's confidence.

In midday trading, the Dow Jones industrial average fell 176.16, or 2.1 percent, to 8,327.90. The Standard & Poor's 500 index declined 21.57, or 2.3 percent, to 901.76, while the Nasdaq composite index fell 44.71, or 2.4 percent, to 1,801.01.

The market's recent rally pushed stock prices back to reasonable levels after they were severely undervalued, said Tim Courtney, chief investment officer at Burns Advisory Group.

With stocks prices back in more normal pricing ranges, "they look less cheap, so bad news like this really starts to sway prices," Courtney said of the unemployment report.

Overseas markets also fell after a report showed unemployment in Europe rose to a 10-year high in May.

"This is part of the market recovery," said Roy Williams, CEO of Prestige Wealth Management. "You're going to get bad news." Williams predicted the unemployment rate is likely to reach 11 percent.

Williams also noted, however that other recent data has shown the economy is beginning to improve. After the market's surge from March lows, Williams said data like the jobless figures will give investors pause and sell stocks.

Declining issues outnumbered advancers by about 6 to 1 on the New York Stock Exchange.

Volume came to a relatively low 357.7 million shares ahead of the holiday weekend, compared with 432.4 million shares traded at the same point Wednesday. Markets will be closed Friday in observance of the Independence Day holiday.

Light volume can lead to more volatile swings in trading.

An upbeat report about May factory orders was not enough to boost traders' confidence amid the weak employment numbers. The Commerce Department said total orders rose 1.2 percent in May, better than the 0.8 percent increase that economists had expected.

Markets kicked off the third quarter on Wednesday with gains after getting some reassuring data on manufacturing and housing. Traders were encouraged by a report showing more stable manufacturing activity and another indicating the fourth straight monthly rise in pending home sales.

Bond prices rose Thursday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.49 percent from 3.54 percent late Wednesday. The yield on the three-month T-bill was flat at 0.16 percent compared with late Wednesday.

The dollar mostly rose against other major currencies, while gold prices fell.

The Russell 2000 index of smaller companies fell 16.97, or 3.3 percent, to 500.49.

Overseas, Japan's Nikkei stock average fell 0.6 percent. Britain's FTSE 100 fell 2.5 percent, Germany's DAX index declined 3.8 percent, and France's CAC-40 fell 3.1 percent.

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