The U.S. unemployment rate rose to 5.8% in February, as businesses eliminated more jobs than at any time since the 2001 recession. Services-producing industries were hit particularly hard.

Nonfarm businesses slashed 308,000 jobs, wiping out the 185,000 gain recorded in January, the Labor Department said Friday. It was another sign that companies don't want to invest in hiring as long as the situation with Iraq is up in the air.

The 5.8% jobless rate is up a tenth of a percentage point from January's 5.7% rate. Economists expected the increase last month, but they had predicted payrolls would actually grow by 5,000. David Wyss, financial economist at Standard and Poor's, called the jobs report dreadful. “There's not a lot here to give you any optimism,” he said.

Nearly two million jobs have been lost since hiring peaked in March 2001. In February alone, 8.5 million were unemployed, up 2.8 million from late 2000. About 1.9 million have been without work for at least 27 weeks.

The job cuts last month were the steepest since companies purged 327,000 from their payrolls following the terror attacks on the World Trade Center and Pentagon. The severity of the job cutting is likely to deal another blow to consumers' confidence in the economy, and, as a result, their spending. So far, that spending has helped keep the economy afloat.

"This is a tangible sign that the uncertainty in the Middle East is really hampering the economy," said Carl Tannenbaum, an economist with ABN-Amro in Chicago. He added that with President Bush's tax-cut package in limbo, an interest-rate cut from the Federal Reserve is “back on the table.”

Payrolls showed "widespread declines" across most sectors, said Kathleen Utgoff, who manages statistics at the Labor Department. Services-producing workers were hit particularly hard. Retail-trade lost 92,000 jobs, and services lost 86,000 jobs. The services industry had held up long after factories began shedding workers, and the cuts are a stark sign for workers.