US employers axed 533,000 jobs in November, the biggest monthly cut since 1974, the US Labor Department said.
In a dramatic indication of the worsening economic situation, the US jobless rate rose to a 15-year high of 6.7% from 6.5% in October.
Since these latest numbers were compiled, further jobs losses have been announced, including big cuts at AT&T.
Recent figures have fuelled fears that the world's biggest economy is set for a deep, long downturn.
The news pushed Wall Street share prices down 2.5% at one stage, but the market then rebounded and eventually closed up 3%.
US oil prices fell to a four-year low, before recovering slightly to close down $1.93 at $41.74 a barrel on Friday.
Four days after the government officially stated that the US economy was in a recession, President George W Bush himself publicly acknowledged the fact.
Speaking at the White House, Mr Bush said: "Our economy is in a recession. This is in large part because of severe problems in our housing, credit and financial markets."
Reacting to the unemployment data, US President-elect Barack Obama said: "There are no quick or easy fixes to this crisis, which has been many years in the making, and it's likely to get worse before it gets better."
Commentators said the jobs figures showed clearly how steeply the US economy was declining.
"This was much worse than was expected and represents wholesale capitulation. The threat of a widespread depression is now real and present," said Peter Morici, a professor at the University of Maryland School of Business.
"This clearly demonstrates that the decline is accelerating," said Tig Gilliam, chief executive of North American operations for Adecco, one of the world's biggest staffing firms.
"It looked mid-year like maybe things would get a little bit better, and now the numbers are just dropping dramatically," he said.
The National Bureau of Economic Research said this week that the US entered a recession in December 2007.
Separately, a measure of US service sector activity, the Institute for Supply Management's index, dropped to a record low in November.
THE UNITED STATES IN 1974
President Richard Nixon resigned after the Watergate scandal
Newspaper heiress Patricia Hearst was kidnapped
The Godfather Part II won the Best Picture Oscar
The US service sector makes up about 80% of US economic activity.
November was the 11th month in a row that the economy lost jobs.
"In the past six months the US has lost 1.55 million jobs, almost as many as were lost in the whole 2001 recession," said Ian Shepherdson at High Frequency Economics.
"You can't get much uglier than this. The economy has just collapsed, and has gone into a free fall," said Richard Yamarone at Argus Research in New York.
The economy contracted at an annual rate of 0.5% from July to September due to the biggest fall in US consumer spending in 28 years.
Many economists believe the gross domestic product will fall even more sharply in the current quarter.
On Wednesday, the Federal Reserve Board painted a bleak picture of the US economy in its influential Beige Book, a report used to help determine US interest rates.
It said economic activity has weakened across the US in the past two months, with retail sales, and vehicle sales in particular, "down significantly".
US companies such as AT&T, DuPont, JPMorgan Chase and mining company Freeport-McMoRan Copper & Gold have announced job cuts this month.
Analysts fear the trend will worsen further.