WASHINGTON — The nation's payrolls grew by a surprisingly weak 121,000 positions in June while wages rose at their fastest annual pace in five years, the Labor Department reported yesterday, renewing fears of a one-two punch of slowing growth and rising inflation.

Most analysts had predicted a net gain of 175,000 jobs in June, and some even raised estimates this week. Instead, businesses reacted to a cooling housing market and rising oil prices by cutting workers in the construction, retail and insurance sectors.

Although employers are hiring less, they appear to be paying more. Yesterday's report showed wages rose more than expected last month, with average hourly earnings up 3.9 percent in the past year, the fastest annual growth since June 2001.

That's good news for workers who have been coping with stagnant wage growth as productivity increased consistently during the recovery. But it might be bad news for the Federal Reserve, which fears rising inflation.

Worries about slowing growth and rising inflation — often called stagflation — helped spark a broad decline in stock market indexes. The Dow Jones industrial average fell 134.63 points, or 1.2 percent, to 11090.67.

Bond yields, however, fell as traders reasoned that weak job growth could give the Fed more leeway possibly to pause from raising rates at its next policymaking meeting Aug. 8.

In an effort to curb inflation and control growth, the Fed has raised rates 17 times since 2004. After its last meeting June 29, the central bank and its new chairman, Ben Bernanke, suggested that growth might have slowed enough to allow them to stop raising rates.

A rate increase could bump up mortgage rates enough to prompt homeowners to cut spending significantly, save more and tip the economy into recession, said University of Maryland economist Peter Morici, former chief economist at the U.S. International Trade Commission.

"The Fed could easily push the economy off of the cliff," Morici said.

The last two recessions, in 1990-91 and 2001, followed repeated rate increases. Some analysts predict Bernanke will hold off on further hikes, convinced by the jobs report that growth is slowing and wages are simply catching up to rising productivity. Although the risk of recession is less than 20 percent, it jumps to 40 percent if the Fed raises rates next month, said Bernard Baumohl, executive director of the Economic Outlook Group in Princeton Junction, N.J.

"He knows it takes time for inflation to slow down, but it will slow down as the economy slows," Baumohl said. "The one thing you don't want to do is to over-tighten."

But Bernanke, who is still trying to make his own mark since replacing longtime Chairman Alan Greenspan this year, has styled himself as an inflation fighter. "Bernanke is worried about establishing his credibility," said Morici, who predicts a quarter-point rate increase to 5.5 percent in the Fed's benchmark short-term rate next month.

Annual economic growth of about 3 percent is expected in any recovery. Although the economy expanded at a quick 5.6 percent clip during the first quarter, most analysts predict a slowdown later this year to between 2 percent and 3 percent.

The economy added 92,000 jobs in May and 112,000 in April, the Labor Department said, 3,000 more than previously reported. For each of the past three months, analysts expected more new jobs than were produced. Job gains of about 150,000 a month are needed to keep up with growth in the labor force, analysts say.

The unemployment rate was unchanged for June at 4.6 percent, the lowest since mid-2001.