But economists polled by CBS.MarketWatch.com had been looking for a deeper 46,000-payroll decline.
"The smaller-than-expected decline can be construed as moderately good news," said Sophia Koropeckyj, economist with Economy.com.
The private sector actually managed a slim employment expansion last month, with overall payrolls reduced largely by cuts at government posts.
Stocks gained on the better-than-expected results, while the bond market reversed lower, nosing yields north as Fed rate-cut expectations were pared. See Market Snapshot and Bond Report.
Meanwhile, April's originally reported 48,000-payroll drop was revised to flat, a sharp improvement after job losses topping the 100,000 mark for both February and March.
"We still see businesses that are hesitant to invest in plants and equipment," Prudential Securities' Michele Girard told CBS News Correspondent Anthony Mason. "That's the one piece of the puzzle that we are missing. And just like they are hesitant to invest, they are hesitant to hire workers."
"While the labor market may feel like the weakest link in the recovery, really it's the last link," said Bill Cheney, chief economist with John Hancock Financial Services.
"As long as employment doesn't collapse, the recovery will continue to gain strength. As it does, slowly jobs will be added and they will be the fuel that kicks the economy into a higher gear."
Average hourly earnings increased 0.3 percent last month, topping forecasts for a 0.2 percent rise. Average hourly earnings have increased 3.2 percent over the past year.
Gains in construction -- the third such monthly increase in a row -- and in professional and business services, education and health partly offset more bleeding of factory jobs and layoffs in government, hospitality and retail. Nearly 2.6 million factory jobs have been lost since July 2000.
In all, a sobering 9 million people were without a job in May, according to Kathleen Utgoff, commissioner of the Bureau of Labor Statistics.
And even within the relatively stalwart business and professional services category, employment is still about 500,000 below its recent peak in April 2000.
Still, economists have been on the lookout for concrete signs that layoffs have stabilized. If growth rebounds later in the year as Federal Reserve Chairman Alan Greenspan is predicting, at least a modest degree of job growth can be expected to follow, they say.
John Vail, senior strategist with Mizuho Securities, suggested that the unemployment rate upticked because the labor force actually expanded. That is, more of the 9 million unemployed felt inspired to begin searching for a job last month. Because more would be counted as looking but unable to find a position, the jobless rate expanded.
The average workweek held steady at 33.7 hours, but the factory workweek expanded to 40.2 hours from 40.1 hours, a slight improvement after a large decline for April. Overtime edged higher last month.
"The uptick in overtime and hours worked is the typical trend prior to payrolls picking up," said analysts at Briefing.com in a research note after the report.
The report introduced several new statistical methods including a conversion to NAICS, the new industrial classification system already used for many Commerce Department statistics, and only directly comparable back to 1990.
The changes allow the government's statisticians to more easily add new industries and break out various service industries.
Ahead of the report, most economists said the new methods wouldn't change the general tone of recent job market statistics.