THE US unemployment rate plunged in February as the economy created a whopping 705,000 jobs, the US government said, pointing to unexpected economic strength which was the trigger for the sharp market falls.

The Labour Department said the unemployment rate fell to 5.5 per cent from 5.8 per cent in January, as the number of jobs created in February was the largest in 12 years.

The surprisingly strong data suggested that the economy rebounded smartly last month from a blizzard-decimated January, dashing investors' hopes for further cuts in interest rate cuts and sending stock and bond prices tumbling.

The sharp rise in payrolls last month more than offset the loss of 188,000 jobs in January, when a blizzard temporarily forced the closure of stores, factories and government offices in the eastern United States.

The Clinton administration hailed the figures as a sign that the economy was returning to full strength. White House chief economist Mr Joseph Stiglitz called the strong jobs growth "extraordinary" at this stage in the nearly five-year-old economic expansion.

"The expected rebound from the January doldrums has come sooner than anticipated so that we now expect to see solid (economic) growth in the first quarter of 1996, as well as throughout the rest of the year," he said.

Taking the January and February figures together - which analysts said provided a better reading, given the distortions caused by the blizzard - the economy created 517,000 jobs over the last two months,

The jobs data are the government's first look at the economy each month and thus are closely watched on Wall Street and in Washington.