By Yoo Choonsik

SEOUL, SOUTH KOREA,  Feb 11 (Reuters) - South Korea shed the most jobs in five years in January, reinforcing market expectations the central bank will cut interest rates to a record low on Thursday to try to support the ailing economy.

The number in employment fell 103,000 to 22.86 million in January compared with a year earlier, the National Statistical Office said on Wednesday, marking the biggest loss since September 2003 in the aftermath of a burst credit bubble.

Analysts said the latest in a series of indicators showing Asia's fourth-largest economy slipping deeper into its first recession in 11 years would increase the case for further action from policy makers.

A local newspaper reported that South Korean authorities would unveil fresh stimulus measures as early as Thursday, including expanding credit guarantees for smaller firms by state-run agencies by some 50 trillion won ($53.80 billion).

The central bank is also expected to cut interest rates on Thursday for the sixth straight time in just four months to stave off a crisis that began in the United States before sweeping worldwide.

"We will see more of a downward spiral in the economic slump and job losses, with exports collapsing and domestic demand flagging," said Lee Sang-jae, an economist at Hyundai Securities. "The bleak economic and job market outlook should push the central bank for more rate cuts."

March treasury bond futures extended gains and Seoul stock market's pared losses as the bleak economic outlook boosted the case for more rate cuts and fresh stimulus measures.

The country's new Finance Minister Yoon Jeung-hyun said on Tuesday that the local economy would shrink by 2 percent this year, the first contraction since 1998.

It was the first admission by the government of a possible contraction in an economy that relies heavily on demand from countries now in recession, such as the United States and Europe.

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The Bank of Korea has slashed its base rate by a combined 2.75 percentage points over the past four months to a record low of 2.5 percent.

Analysts surveyed earlier this week by Reuters predicted the Bank of Korea would cut the rate by half a percentage point to 2.0 percent at a monthly meeting on Thursday.

The series of figures pointing to an economic contraction have put the country's unpopular president, Lee Myung-bak, under pressure to take extra steps to revive the economy and create jobs.

Maeil Business Newspaper on Wednesday quoted an unidentified government official as saying the local authorities plan to announce a fresh stimulus package on Thursday, including expanded credit guarantees for smaller companies.

South Korea has already offered some 140 trillion won in fiscal spending and tax cut plans, equivalent to some 15 percent of the annual gross domestic product, as an increasing number of analysts predict a steep economic contraction this year.

The International Monetary Fund forecast last week South Korea's economy would contract by 4 percent in 2009, while brokerage CLSA forecast a 7 percent drop, which would mark the worst in the country's near 40-year period of industrialisation.

Separate figures from the country's top financial regulator showed on Thursday more of local bank assets soured in December as the economic slump squeezed South Korean households and companies.

South Korean banks saw the ratio of non-performing loans to total loans rise to a 3-year high of 1.11 percent at the end of December, Financial Supervisory Service data showed.

South Korean authorities have pledged to keep flooding the financial system with cheap and easy money, but analysts have said consumers and companies most in need are still struggling to secure funds to honour their debts.

(Additional reporting by Seo Eun-kyung and Cheon Jong-woo; Editing by Jonathan Thatcher)