Financial markets reacted harshly, with major stock gauges sliding and safe-haven Treasuries soaring after the surprisingly poor data raised doubts about the recovery's staying power.

"The Chicago Purchasing Managers' (index) fell off a cliff. It is an ugly report," said Cary Leahey, economist at Deutsche Bank Securities.

The news also stocked speculation the Federal Reserve may again cut its target interest rate from a 45-year low of 1 per cent in coming months. Fed officials have said they could cut rates if layoffs mount despite faster economic growth.

After a brief spurt of August hiring, Chicago-area firms stepped up layoffs in September, according to the National Association of Purchasing Management-Chicago. A separate report from the Conference Board showed the "jobs hard to get" gauge n its Consumer Confidence Survey -- seen as a good indicator of labor market trends -- jumped to a nearly 10-year high.

Some economists fear the current bout of robust growth may wind down once the impact of the recent round of tax cuts starts to fade, with workers still losing jobs nearly two years after the recession ended. Consumer spending makes up two-thirds of economic activity.

Analysts and investors will look closely at Wednesday's report on national manufacturing from the Institute for Supply Management and the Labor Department's payrolls report on Friday for confirmation of the souring outlook. Forecasts are for 30,000 job losses in September after a 93,000 decline the prior month.

For now, corporate America is still getting rid of workers. Ford Motor Co said on Tuesday it will slash 2,800 salaried jobs in a bid to trim costs by the end of the year.

"People may be losing their faith in a strong recovery because of the job situation," said Stephen Stanley, senior market economist at RBS Greenwich Capital.