Jul. 19--A worsening economic downturn and the state's $15 billion budget deficit are driving unemployment to its worst levels in a decade.

California's unemployment rate inched up a tenth of a percentage point last month to 6.9 percent, state officials said Friday. It was the highest unemployment in California since January 1997, when the state was still dealing with the lingering effects of the recession in the early 1990s.

The numbers released by the Employment Development Department made clear that the economic slowdown is deepening. They also illustrated the impact on the state treasury: Government jobs declined during the month, particularly in Sacramento.

Though the number of state jobs often dips in the summer, the loss of 1,900 state jobs in June helped drive Sacramento-area unemployment to 6.8 percent, an increase of four-tenths of a point. Unemployment in the region that includes Sacramento, Placer, El Dorado and Yolo counties is at its highest since March 1996.

Other sectors continued to struggle in June, but the decline in state jobs was particularly troubling for the capital. For the past year or so, state hiring had been one of Sacramento's most reliable job sources, acting as an economic cushion while the private sector faltered.

"Government was holding us up there," said Howard Roth, chief economist at the state Department of Finance.

The first inkling of problems came last November, when the state canceled a $520 million office project near the Capitol. As the budget situation has deteriorated, experts said the state would play a diminishing role in job growth in the Sacramento area.

An analysis by The Bee last month showed that the state was still hiring through May. It wasn't immediately clear what caused the shrinkage in payroll in June, but it appeared that agencies were moving more slowly to fill vacancies, said Lynelle Jolley, a spokeswoman for the state Department of Personnel Administration. The state has not laid off any full-time workers.

"It could well be the budget," Jolley said. "Departments are doing everything possible to eliminate vacancies." The loss of 1,900 jobs represented a 1.7 percent decline in Sacramento's state payroll.

As for the overall economy, "the numbers say we're in a mild recession," said Stephen Levy, director of Palo Alto's Center for Continuing Study of the California Economy. "We've had job losses in five of the last six months."

Employers across the state reduced payrolls by 12,800 jobs in June and cut 39,900 jobs over the past year, a reduction of 0.3 percent. In the Sacramento area, payrolls shrank by 100 during the month and have dropped 7,100, or 0.8 percent, since last year.

At 6.9 percent, California is tied with Mississippi for the third-highest unemployment in the nation, behind Michigan's 8.5 percent and Rhode Island's 7.5 percent.