The slowdown in productivity caused a jump in unit labour costs, a key gauge of inflation or profit pressures. They rose at a 2.3 percent rate, the biggest increase since a matching gain in the second quarter of 2002 and a step-up from the third quarter's downwardly revised 1.6 percent pace.
The department also said initial filings for state unemployment benefits fell to 316,000 in the week ended January 29. This matched a figure reached seven weeks ago as the second lowest since before the economy tipped into recession in 2001.
Economists had looked for claims to move up to 330,000 from the 325,000 reported for the January 22 week and had forecast productivity growth to slow only a touch to a 1.7 percent pace from the third quarter's 1.8 percent rate, with unit labour costs up at 2 percent rate.
"Companies can't squeeze more out of their existing workforce. They must hire," said Christopher Low, chief economist at FTN Financial in New York.
Prices for US government bonds slipped in the wake of the data and stock futures moved lower, while the value of the dollar was little changed.
For the year as a whole, nonfarm business productivity, or worker output per hour, grew 4.1 percent, the Labour Department said. While the annual growth rate is healthy by historic standards, it nonetheless marked the smallest gain since 2001.
As productivity slows, firms are forced to hire more workers, which helps employment growth and underpins economic expansion. But profit margins will erode unless businesses can pass along their increased payroll costs to consumers.
The Fed on Wednesday raised interest rates by a quarter-percentage point for the sixth straight time, taking the overnight lending rate to 2.5 percent. Officials said they expect to be able to keep inflation at bay by moving rates up at a "measured pace."
In another upbeat sign for the labour market, the number of unemployed still on the benefit rolls after an initial week of aid dropped by 116,000 to 2.70 million in the week ended January 22, the latest week for which figures are available.
The drop in so-called continued claims brought the four-week average for that to its lowest since April 2001.