U.S. private sector shed 40,000 jobs in Dec

UPDATE 1-U.S. private sector shed 40,000 jobs in Dec-report

(adds details, market reaction)

NEW YORK, Jan 3 (Reuters) - U.S. private sector employment contracted in December, the first time since April 2003, a private employment service report showed on Wednesday.

The monthly ADP National Employment Report showed private sector employers shed 40,000 jobs after adding 158,000 jobs in November. The report is based on payroll data and measures the change in total private sector nonfarm employment each month.

"These findings suggest an abrupt slowing of employment, following three months during which, according to the ADP National Employment Report, gains in private nonfarm employment averaged 121,000 per month," said Joel Prakken, chairman of Macroeconomic Advisers.

The median forecast for the ADP report from 10 economists surveyed by Reuters pointed to a reading of gains of 128,000 jobs for the December.

Government bond prices rallied on the report, which hinted that the government's closely watched nonfarm payrolls report for December, due on Friday, might prove soft, although economist debate the extent of the correlation between the two reports.

"This is a big surprise ... there is no evidence of systematic problems in the ADP survey," said Ian Shepherdson, chief U.S. economist at High Frequency economics in New York. He said his firm would cut its estimate for the Labor Department's report to 75,000 jobs created, from an original estimate of 100,000.

"ADP is not perfect and is sometimes horribly wrong, but it is the best of a bad bunch of payroll indicators and cannot be completely ignored."

According to the latest Reuters poll of economists, Friday's report is expected to show that 110,000 nonfarm payroll jobs were created in December, down from 132,000 in November.

Investors will be looking to the nonfarm payrolls report for clues on the timing of the first interest rate cut after the Federal Reserve tightened monetary policy 17 times between June 2004 and June 2006.