LONDON/WASHINGTON - U.S. stocks dropped sharply in early trading Friday after data showed the economy was creating jobs at a strong pace, giving the Federal Reserve cover to continue with hefty interest rate hikes to quell inflation.

All three major U.S. indices opened lower for the final trading day of the week, with bets on the Federal Reserve raising rates by 75 basis points at its next meeting increasing, sending the dollar higher.

The Dow Jones Industrial Average was down 1.69%, the S&P 500 lost 2.17% and the Nasdaq Composite declined 2.79%.

The MSCI world equity index, which tracks shares in 45 nations, was 1.95% lower.

The U.S. Labor Department reported Friday that nonfarm payrolls increased by 263,000 in September - slightly above expectations - with the jobless rate dipping to 3.5%, below forecasts.

The data cut through any lingering sense that the Fed and other global central banks might soon ease up on their tightening cycles.

"With this jobs report it seems clear we are on course for another significant hike from the Fed, with the market pricing in a 75 bps rise in interest rates at its next meeting," said Paul Craig, portfolio manager at Quilter Investors.

The dollar and U.S. Treasury yields surged after the labor report, as investors bet on safe havens. The dollar index , which tracks the greenback versus a basket of six other major currencies, was up 0.29% to 112.589. Yields on benchmark 10-year Treasury notes were up 8.4 basis points at 3.906%.

In Europe, the STOXX index of 600 leading companies, flat ahead of the U.S. data, was down 1.12%.

The immediate focus is on earnings for the United States and whether consumers are holding up in the teeth of rate hikes, Patrick Spencer, vice chairman of equities at Baird Investment Bank, said.

"Bank earnings start next week from Morgan Stanley, JP Morgan, Wells Fargo and Citi. That's going to be a pretty good indication because they all have big credit card businesses and they'll give us a very good indication on the consumer," Spencer said.


Apart from the U.S. earnings season kicking off, analysts pointed to other key data.

"Next week, it all comes down to the U.S. inflation release," UniCredit analysts said in a note to clients.

Fed officials showed no intention of backing down from the most aggressive rate hike campaign in decades, with Fed Governor Lisa Cook, Chicago Fed President Charles Evans and Minneapolis Fed President Neel Kashkari this week all emphasising that the inflation fight was ongoing and they were not prepared to change course.

Markets currently price in a 92% chance of a 75-basis-point increase for next month's Federal Open Market Committee meeting.

Sterling reversed course to fall 0.44% to $1.111. The euro also fell, down 0.38% at $0.9754.

Crude oil continued to tick up after a rapid climb triggered by OPEC+ output cuts announced this week. Brent crude was up 1.53% to $95.86 a barrel and U.S. crude prices were up 1.68% at $89.95 a barrel.

(Reporting by Huw Jones in London and Pete Schroeder in Washington, Lucy Raitano, Kevin Buckland; Editing by Andrea Ricci, Kirsten Donovan)