Updated prices at 3:09 p.m ET/1909 GMT

By Sinéad Carew and Nell Mackenzie

NEW YORK/LONDON, Sept 6 (Reuters) -MSCI's global equities gauge fell more than 1% on Friday and U.S. Treasury yields dropped as investors worried about the health of the economy after a mixed U.S. jobs report cemented expectations for the Federal Reserve to lower interest rates this month, but created uncertainty about the size of the cut.

The Labor Department reported that U.S. employment increased less than expected in August while the jobless rate dropped in line with expectations to 4.2% from 4.3% in July, suggesting an orderly slowdown in the labor market.

Nonfarm payrolls rose by 142,000 in August, short of the 160,000 growth economists polled by Reuters had expected while July numbers were revised down to 89,000 from 114,000.

"The headline number of 142,000 would ordinarily be considered healthy, but this labor market is held together by duct tape and string," said Brian Jacobsen, chief economist at Annex Wealth Management, Menomonee Falls, Wisconsin.

By Friday afternoon, traders were betting on a 73% probability the Fed would cut rates by 25 basis points this month versus 60% on Thursday, while bets for a 50 basis point cut fell to 27% from 40%, CME Group's FedWatch tool showed.

Fed officials signaled they would start rate cuts at their meeting in two weeks, noting that a labor market cooling could accelerate into something more dire without a policy shift. The remarks were widely seen as endorsing a 25 basis point cut while leaving the door open to further and perhaps bigger moves should the job market keep slowing.

"Could the Fed cut by 50 bps? Yes, but will they? No. They probably want to start with 25 and retain the option to increase that to 50 rather than just jump right into a 50,” said Jacobsen at Annex Wealth Management.

Wall Street indexes opened higher after the report but kept gradually declining into the late afternoon.

At 3:09 p.m. EDT (1909 GMT), the Dow Jones Industrial Average .DJI fell 337.76 points, or 0.83%, to 40,417.99; the S&P 500 .SPX lost 83.64 points, or 1.52%, to 5,419.77; and the Nasdaq Composite .IXIC lost 385.55 points, or 2.25%, to 16,742.11.

MSCI's gauge of stocks across the globe .MIWD00000PUS fell 9.79 points, or 1.20%, to 802.88. Earlier, Europe's STOXX 600 .STOXX index closed down 1.1%.

Germany's DAX index .GDAXI closed down 1.5% earlier after data showed the country's industrial production fell 2.4% in July, compared with analyst expectations for a 0.3% drop.

In the bond market, benchmark 10-year Treasury yields were lower after the payrolls report but came off of a 15-month low.

"The market's really struggling with this one because it's really in the middle of what could be used as a justification for either a 25 or 50 basis point rate cut," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.

The yield on benchmark U.S. 10-year notes US10YT=RR fell 1.9 basis points to 3.714% from 3.733% late on Thursday, but the 2-year note US2YT=RR yield, which typically moves in step with interest rate expectations, fell 8.9 basis points to 3.6627% from 3.752% late on Thursday.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=RR, seen as an indicator of economic expectations, was at a positive 4.9 basis points.

In currencies, the dollar index rose in volatile trading with focus on the steady slowdown in the labor market suggesting more rate cuts after September.

"A half-point rate cut at the central bank's September meeting remains unlikely, but today's release provided clear evidence of a sharp deterioration in labor market fundamentals, and will bolster bets on at least one jumbo-sized rate cut in the coming months," said Karl Schamotta, chief market strategist at payments company Corpay in Toronto.

The dollar index =USD, which measures the greenback against a basket of currencies including the yen and the euro, gained 0.17% to 101.21. The EUR= was down 0.24% at $1.1083.

But against the Japanese yen JPY=, the dollar weakened 0.73% to 142.39.

In energy markets, oil prices sold off sharply in their fifth straight day of declines as demand concerns outweighed delayed supply increases by OPEC+ producers.

U.S. crude futures CLc1 settled down 2.14% at $67.67 a barrel, at their lowest close since June 2023 while Brent LCOc1 ended the session at $71.06 per barrel, down 2.24%, for its lowest close since December 2021.

In precious metals, gold prices sank from near-record levels earlier in the day. Spot gold XAU= lost 0.96% to $2,492.20 an ounce. U.S. gold futures GCc1 fell 1.1% to $2,483.70 an ounce.

Reporting by Sinéad Carew, Chuck Mikolajczak, Karen Brettell, Saqib Iqbal Ahmed, Nell Mackenzie and Stella Qiu; Editing by Mark Potter, Alexander Smith, Richard Chang and Jonathan Oatis

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