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By Leah Schnurr
OTTAWA, June 10 (Reuters) - Canada added far more jobs than expected in May as hiring picked up in construction and manufacturing, although a drop in the unemployment rate to a 10-month low stemmed from fewer people looking for work.
Statistics Canada data released on Friday showed an increase of 13,800 positions last month, topping economists' forecasts for a gain of just 3,800 jobs.
Economists said that although the report was encouraging, the Bank of Canada was likely to remain cautious, with the full impact of the wildfires in Alberta still unknown. The report can also be volatile from one month to another.
"In the face of uncertainty, I think it is just an environment of staying on the sidelines," said Paul Ferley, assistant chief economist at Royal Bank of Canada.
The central bank cut interest rates twice last year to combat the oil shock and is seen on hold until into 2017.
Construction jobs rose by 18,600, and manufacturers added 12,200 positions. Analysts have been looking for a pickup in both industries to offset the drag from the resource sector due to cheaper oil prices.
The "other services" category, which includes civic and professional organizations, added 23,900 positions.
The Canadian dollar strengthened against the greenback immediately following the report.
While the unemployment rate fell to its lowest since July at 6.9 percent, the participation rate also declined.
Alberta shed 24,100 jobs, with losses concentrated in natural resources. That helped drive the sector down by 15,900 at the national level, continuing the weakness since 2014, when oil prices started to fall.
The number of hours worked in Alberta tumbled 5.1 percent, the biggest monthly decline in 30 years, as wildfires in the northern part of the province disrupted oil production and other industries.
Statistics Canada said it did not collect survey data for the Fort McMurray area, which was evacuated due to the fires. With Fort McMurray accounting for 2 percent of Alberta's population, the impact on the national figures was negligible, the agency said.
Still, fire-related destruction and disruption is expected to weigh on the economy in the second quarter before growth resumes.
The Bank of Canada estimates the impact of the fires could take 1.25 percent off growth in the second quarter, which could mean a contraction for the period.
The drop in commodity prices sent oil-exporting Canada into a mild recession last year, but most economists do not expect to see that again.
Additional reporting by Andrea Hopkins in Toronto; Editing by Lisa Von Ahn