(Updates with U.S. afternoon trading)
* Sterling dives 10 percent, recoups most losses
* U.S. jobs growth slows, jobless rate rises
* Wall Street falls, Europe’s STOXX index lower
* Traders still betting on year-end Fed rate hike
* Oil down but still tracking to strong week
By Lewis Krauskopf
NEW YORK, Oct 7 (Reuters) - Sterling recouped much of its losses on Friday after a stunning plunge on fears over Britain’s exit from the European Union, while stocks in major markets fell after a weaker-than-expected U.S. jobs report still did not sway expectations for a U.S. interest rate hike by year-end.
Sterling plummeted nearly 10 percent in earlier trading in what traders called a “flash crash” that knocked the British currency to a 31-year low. The currency had already been under pressure this week as some national leaders called for Britain to make a “hard” exit from the EU.
Sterling was last down 1.3 percent against the dollar at about $1.2450.
“I think it’s a warning shot from the markets to the UK about what type of potential volatility in sterling we may see down the line,” said Shahab Jalinoos, global head of FX strategy at Credit Suisse in New York.
After the U.S. jobs report, the dollar edged down 0.1 percent against a basket of currencies in volatile trading after rising to two-month highs. The greenback weakened 0.8 percent against the yen.
Data showed U.S. employment growth unexpectedly slowed for a third month in September and the jobless rate rose. Nonfarm payrolls rose 156,000, down from a gain of 167,000 jobs in August, the Labor Department said.
After the report, traders were virtually discounting chances that the Federal Reserve would raise rates at its next meeting in November, according to the CME FedWatch website. But they saw a roughly 70 percent chance for a rate hike in December, slightly higher than bets from a day earlier.
Cleveland Fed President Loretta Mester called the job growth “solid” and said she continues to believe it appropriate for the U.S. central bank to raise rates.
Markets have been dominated by central bank policy, including a shift from the Bank of Japan last month, resurgence in talk of the European Central Bank possibly tapering its bond buying program, and the outlook for a Fed rate hike.
After the jobs report, major U.S. equity indexes were lower in afternoon trading.
The Dow Jones industrial average fell 84.4 points, or 0.46 percent, to 18,184.1, the S&P 500 lost 12.53 points, or 0.58 percent, to 2,148.24 and the Nasdaq Composite dropped 33.45 points, or 0.63 percent, to 5,273.40.
“There’s a fear in investors that the Fed may be looking at raising rates again into a slowing economy, a replay of last December,” said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama. “It’s easier to step to the sidelines and wait to see what happens, if that transpires or not.”
The S&P industrials sector dropped 1.6 percent. Honeywell shares plunged 8.3 percent after a disappointing profit report from the diversified manufacturer.
MSCI’s gauge of stocks across the globe fell 0.5 percent.
The pan-European STOXX index shed 0.9 percent. Shares of vouchers company Edenred tumbled after a brokerage downgrade on the stock.
But Britain’s FTSE 100 index rose 0.6 percent, propped up by the fresh slump in sterling.
In choppy trading after the jobs report, benchmark 10-year U.S. notes were last up 2/32 in price to yield 1.7357 percent. Yields earlier rose as high as 1.77 percent, the highest in four months.
Oil futures fell as players took profit following a strong rally this week spurred by hopes of OPEC output cuts.
Benchmark Brent dropped 1.7 percent to $51.63 a barrel, while U.S. crude fell 1.5 percent to $49.70.
Spot gold fell 0.2 percent and was on track for its worst week this year. (Additional reporting by Richard Leong, Chuck Mikolajczak, Barani Krishnan and Karen Brettell in New York and Vikram Subhedar in London; Editing by Bernadette Baum and James Dalgleish)