The search for jobs: More people are attending job fairs
More US workers lost jobs last year than in any year since World War II, with employers axing 2.6 million posts and 524,000 in December alone.
The US jobless rate rose to 7.2% in December, the highest in 16 years.
The official data came as plane-maker Boeing said it would cut 4,500 jobs this year at its commercial airline arm due to the global economic slowdown.
US President-elect Barack Obama said that the economic situation is dire and action is urgently needed.
"Clearly the situation is dire. It is deteriorating and it demands urgent and immediate action," he told a news conference.
He added that he was making good progress on in talks with Congress on a new stimulus package - estimated to cost $800bn (£526bn).
Shares fell on the news of the job losses, with the main Dow Jones index ending Friday trading down 143 points or 1.6% to 8,599.
Oil prices slipped more than $1 a barrel to below $41 a barrel. The rise in unemployment raised fears of slackening demand for oil.
The annual jobless total was higher than expected, partly because jobless figures in November and October were revised upwards.
November's job losses were revised to 584,000 from 533,000 while October's losses were revised to 423,000 from 320,000.
More than half of the job losses last year were in the last four months of the year.
Analysts had forecast that 550,000 jobs would go in December.
Most December job losses were in the service sector, which shed 273,000 jobs. Manufacturing jobs fell by 149,000 in December, while employment in construction fell by 101,000, with retailers cutting staff by 67,000.
Some of those lucky enough not to lose their jobs, had their hours reduced. The number of aggregate hours worked in December fell 0.2 hours to 33.3 hours, the lowest level since records began in 1964.
WHERE THE JOBS WERE LOST
Temporary work: 490,000
2008 figures from US Labor Department
"The drop in average hours worked in this employment report suggests that the first quarter is going to be very, very weak," said Cary Leahey, economist at Decision Economics.
The number of people who worked part time - because their hours had been cut back or because they were unable to get full-time work - increased by 3.4 million to 8 million in the last 12 months.
Boeing said its job cuts would affect staff at its factories in the Seattle area.
It added that many of the reductions will be in roles not directly associated with aircraft manufacturing.
The cuts are due to occur between April and June.
Boeing says those affected will receive 60-day notices starting in late February.
Its announcement comes after AT&T, the telecoms giant, said last month that it was reducing its workforce by 4% and cutting 12,000 positions.
'Ugly and getting uglier'
Anthony Conroy, head trader at Bny Convergex, said: "Well, the numbers look better than I think many were anticipating. I had heard anywhere from 500,000 to about a million, so it's definitely better than anticipated."
Other analysts found little consolation in the figures.
"No matter how you look at it, these are dismal numbers," said Matt Esteve, foreign exchange trader at Tempus Consulting.
Added Richard Yamarone, chief economist of Argus Research: "The job situation is ugly and is going to get uglier. There's no reason to expect hiring anytime in the next three to six months. We are not going to see any hiring until the government steps in and acts."