NEW YORK (Reuters) – US private sector employers added jobs in May and the economy's dominant services sector increased payrolls for the first time in more than two years, building evidence that the labour market was picking up steam.

New claims for unemployment insurance also fell last week, leaving investors bracing for more good news today, when the government's employment report is expected to show the economy added the most jobs last month since September 1983.

"I think these reports show the labour market is in fact stabilising. ADP was slightly weaker than expected but foreshadows a good number tomorrow," said John Doyle, senior currency strategist at Tempus Consulting in Washington.

Private employers added 55,000 jobs last month, according to the ADP Employer Services report yesterday, a bit weaker than forecast but still a sign of improved conditions, analysts said. April's tally was revised upward to 65,000 from an initially reported job gain of 32,000.

Economists expect today's more closely-watched payrolls report, which includes private and public sector jobs, to show the economy added 513,000 jobs in May.

While two-thirds of that total are likely to be temporary hires to conduct the 2010 US Census, it still would mark the most jobs added since September 1983, when employers hired slightly more than 1 million new workers. It would also be the fifth straight month of job gains.

There were signs of improvement from other reports as well, with the Labour Department reporting initial claims for state jobless benefits dropped 10,000 to a seasonally adjusted 453,000, a touch above market expectations of 450,000.

Employment in the non-manufacturing sector also rose for the first time since December 2007, the Institute for Supply management said, with the overall sector growing for a fifth straight month.

But the pace of growth in the dominant services sector, the main component of the index and the source of most US jobs, remained tepid.

Zach Pandl, US economist at Nomura Securities, called growth in the sector "encouraging" but added that "at the same time, the current level is not consistent with rapid growth in the economy."

Although the economy has now grown for three straight quarters after enduring the worst downturn since the 1930s, stubbornly high unemployment is eroding President Barack Obama's popularity and threatens to hurt his Democratic party in mid-term Congressional elections in November.

And while some indicators support views the labour market recovery is firming, claims for jobless benefits remain above levels usually associated with sustainable employment growth.

The number of people still receiving benefits after an initial week of aid unexpectedly rose 31,000 to 4.67 million in the week ended May 22, the highest since early April, the Labour Department said.

In a separate report, the Labour Department said US non-farm productivity grew at a 2.8 percent annual rate rather than the previously reported 3.6 percent pace. That was the smallest advance in a year.

Following a rapid expansion in the previous three quarters as businesses squeezed more output from a small group of workers, productivity is slowing down, and analysts expect the trend to continue as companies increase payrolls.

Some companies have held off hiring new workers, opting instead to add hours for the existing workforce, but analysts believe this policy cannot continue indefinitely.

"When the recovery first started, businesses could get more out of their existing workforces, but that's becoming more and more difficult," said Gus Faucher, director of macroeconomics for Moody's Analytics in West Chester, Pennsylvania.

"We are starting to see employment pick up so we expect to see productivity growth weaken and job growth pick up as a result."

The economy grew at an annual pace of three percent between January and March, slowing from a 5.6 percent rate in the fourth quarter.

Elsewhere, the US Commerce Department said new orders received by US factories rose 1.2 percent in April, below economists' expectations and down from 1.7 percent in March.