Mumbai: Former Federal Reserve chairman Alan Greenspan said the current market turmoil is "identical" in many ways to that which occurred in 1987 and 1998 even as US payrolls shrank in August for the first time in four years.

The decline in payrolls reported by the US labor department prompted calls for the Federal Reserve to lower interest rates before credit market turmoil drags the economy into recession.

"The behavior in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998, what we saw in the stock-market crash of 1987," the Wall Street Journal quoted Greenspan in its online edition.

Greenspan, now a consultant but was Fed chairman from 1987 to 2005, said business expansions are driven by euphoria and contractions by fear. He made the comment at an event in Washington organised by the Brookings Papers on Economic Activity, an academic journal, the report said.

He said the expansion phase of the economy is quite different where euphoria is the driver, and "fear as a driver for the downturn, which is going on today, is far more potent than euphoria."

The labour department''s report of 4,000 fewer non-farm jobs has shocked financial markets that had anticipated continued job creation.

While government officials tried to allay fears that the turmoil in credit markets stemming from rising defaults on subprime mortgages was spreading, treasury secretary Henry Paulson said a softening housing sector "is going to extract a penalty on growth, and what we''re going through in the credit markets is very apt to extract a penalty on growth, but the economy is going to continue to grow in the second half of the year."

The last time the economy shed jobs was in August 2003, when a drop 42,000 non-farm jobs was reported.

The chairman of the congressional Joint Economic Committee, Democratic Senator Charles Schumer, said the soft jobs report was "a punch to the gut of our economy" that implied the subprime lending crisis threatens to engulf the broader economy.

House financial services committee chairman Barney Frank made a call for the Fed to rescue the economy quickly with lower interest rates.

Stock prices plummeted on fears about possible recession. On Friday, the Dow Jones industrial average lost 249.97 points to end at 13,113.38 and the Nasdaq Composite Index closed down 48.62 points at 2,565.70.

Bond prices soared as investors became convinced that the Fed would cut interest rates, with the only questions being how soon and by how much.

In addition to the August job losses, the labor department revised down its estimates for hiring in June and July by a total of 81,000. It said 68,000 jobs were added in July rather than 92,000 and 69,000 in June instead of 126,000.

Despite the job losses in August, the unemployment rate - complied from a separate survey of households - was unchanged from July at 4.6 per cent as a shrinking workforce offset a decline in employment. It has held in a range from 4.4 per cent to 4.6 per cent since last September.

The turmoil in credit markets only set in at mid-August and it is unclear how it may affect the overall economy. Some big financial services firms already have announced layoffs as they trim their subprime mortgage business.

Commerce secretary Carlos Gutierrez said the economy was benefiting from rising exports and consumer spending was holding up.

Job losses in August were concentrated in the goods-producing sector. A whopping 46,000 manufacturing jobs were cut, the most since an 86,000-job cut in July 2003.

Construction businesses shed another 22,000 jobs, up from 14,000 that were lost in July. Service industries added 60,000 jobs in August.

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