WASHINGTON — The U.S. economy edged a step closer to recession in December by producing only 18,000 new jobs, its worst performance in four years, and sending the unemployment rate to a two-year high of 5 percent, the Labor Department said yesterday.

The meager job gains, much weaker than expected, showed the toll that tightening credit, a slumping housing market and a staggering stock market are taking on the nation. The worst of the job-market trouble was concentrated in construction, which shed 49,000 jobs, and manufacturing, which lost 31,000.

But the losses were widespread, suggesting that the economy's troubles run deep. They were compensated for by gains in only a few areas, especially healthcare, food service and government.

"There's nothing heartwarming about this report," said Neal Soss, chief economist with Credit Suisse Group Inc. in New York. "It confirms what economists have been worried about, which is a broad-based economic slowdown."

Stocks tumbled on the news. The Dow Jones industrial average ended the session down 256.54 points, or nearly 2 percent, to 12,800.18. That left the blue-chip index near its close of 12,743 on Nov. 26, which was its weakest finish since the housing and credit debacle began in midsummer.

The weak hiring was accompanied by stronger-than-usual wage growth. Average hourly earnings increased 7 cents, or 0.4 percent, to $17.71 in December, according to the Labor Department. That was up 4.3 percent from a year ago, and, though good news for working people, it made the Federal Reserve's job of managing the economy harder by adding a whiff of inflation even amid signs of a slowdown.

President Bush, meeting yesterday with financial advisers, including Treasury Secretary Henry M. Paulson Jr., said the economy was solid despite the jobs slowdown.

"This economy of ours is on a solid foundation, but we can't take economic growth for granted," he said. "There are signs that will cause us to be ever more diligent and to make sure that good policies come out of Washington. ... We've had 52 straight months of job creation, but job growth slowed last month. The core inflation is low, but U.S. consumers are paying more for gasoline and for food. Consumer spending is strong, yet the values on many of the homes in America are beginning to decline."

Urging Congress to keep taxes low, Bush said, "If the foundation is strong, yet indicators are mixed, the worst thing the Congress could do is raise taxes on the American people and on American businesses."

Analysts said that despite the inflation danger, the Fed was likely to further cut interest rates later in January in an effort to dodge recession. The central bank already has sliced its signal-sending federal funds rate, the interest banks charge each other for short-term loans, a full percentage point since September, when it first reacted to the subprime mortgage mess and deepening credit crunch. That rate now is 4.25 percent.

"The job market is operating at stall speed," said Mark Zandi, chief economist of Moody's www.Economy.com, a West Chester, Pa., research company. "Either something is going to revive it quickly or we're going to get into an unraveling vicious cycle of declining spending and the even weaker job growth."

Investment banks Goldman Sachs & Co. and JPMorgan Chase & Co. yesterday both predicted a half-point cut in the Fed's key rate when policymakers meet Jan. 30.

December's addition of 18,000 positions was the job market's worst performance since August 2003, when the economy lost 42,000 jobs. The December number was down from an upwardly revised November job gain of 115,000 and a downwardly revised October gain of 159,000.

For all of 2007, employers added 1.3 million payroll positions, compared with 2.3 million in 2006, according to the Labor Department. Both figures were anemic compared with the economy's performance in the late 1990s, when the economy regularly would add 3 million or more employees a year.

December's unemployment rate of 5 percent was three-tenths of a point higher than November's 4.7 percent rate, the largest single-month jump in joblessness since April 1995.

Analysts had expected the economy to add 50,000 to 70,000 jobs in December.

The report spooked investors who had taken solace in the belief that steady job and wage growth would prop up consumer spending, lessening the blow from the housing maelstrom.

"The worry here is that we have been creating new consumers by creating new jobs and they've been spending their income," said Jim Swanson, chief investment strategist at the MFS mutual fund group. "Now it looks like job growth is ratcheting down."

HAWAI'I JOBLESS RATE CREEPING UP

Yesterday's U.S. jobless report came about two weeks before the expected release on Jan. 18 of Hawai'i's December state unemployment figures.

Statewide unemployment has been well below the national rate, but has been creeping up. Rates averaged below 2.5 percent through the first five months of 2007. They hit 3 percent in November.

Most economists project Hawai'i will enjoy economic growth this year, although it will be slightly slower than 2007's gain.