(Updates with reaction, details)
LONDON, Oct 14 (Reuters) - The number of Britons claiming jobless benefit rose by 20,800 in September, less than expected and the smallest rise since May 2008, official data showed on Wednesday, in a sign that the worst of the job shedding due to the recession could be over.
The Office for National Statistics said that took the claimant count rate to 5.0 percent last month from 4.9 percent in August, its highest since September 1997. Analysts had predicted a rise of 25,000 in the claimant count in September.
The number of people without a job on the wider ILO measure of unemployment rose by 88,000 to 2.469 million in the three months to August, leaving the jobless rate at 7.9 percent -- below expectations for a reading of 8.0 percent.
The pound rose about half a cent against the dollar after the figures showed that while unemployment is still rising in Britain, the rates of monthly increase are easing -- a sign that the labour market may not be as hard hit as some had feared.
"It does suggest that the pace of deterioration in the jobs market is easing quite sharply which is encouraging for the outlook for a sustainable recovery," said Philip Shaw, chief economist at Investec.
The ONS said the increases in the ILO unemployment level and rate were the smallest since May-July 2008, although the 7.9 percent rate equals the figure for May-July 2009 which was the highest rate since Sept-Nov 1996.
For a graphic showing UK unemployment, click here:
http://graphics.thomsonreuters.com/109/UK_CLMILO1009.gif
The economy is starting to show signs of recovery after a year-long recession. Some analysts had predicted the ILO unemployment rate could top 10 percent next year.
There is still a great deal of uncertainty about the strength of any recovery, given a continued dearth of bank lending despite extensive measures from the Bank of England and government to get credit flowing again.
Although the downward trend in the labour market seems to be easing, Wednesday's data portrayed the damage already done.
The number of vacancies in the economy in September fell to 422,000, the lowest since records began in 2001. Average earnings excluding bonuses rose by just 1.9 percent in the three months to August compared to the same period a year ago -- also the weakest on record.
(Reporting by Matt Falloon and Fiona Shaikh; Editing by Toby Chopra)