Wall Street climbs to three-month high on strong payrolls

NEW YORK (Reuters) - Wall Street rallied to its highest level since early May on Friday on a stronger-than-expected jobs report, putting the S&P 500 on track to snap a four-day losing streak.

Employers hired the most workers in five months in July, giving a lift to sentiment. At the same time, a rise in the unemployment rate to 8.3 percent kept alive the possibility that the Federal Reserve could provide additional stimulus to the economy.

The market had already been gearing up for a strong start after investors took a second look at Thursday's statement by European Central Bank President Mario Draghi, seeing signs that aid would eventually come to the euro zone's debt-stricken nations.

"A lot of market participants began to rethink yesterday's ECB statement and look at it from a more positive perspective. Overall, a lot of investors thought maybe it's not as bad as it originally sounded," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

The Dow Jones industrial average <.DJI> gained 250.97 points, or 1.95 percent, to 13,129.85. The Standard & Poor's 500 Index <.SPX> gained 28.64 points, or 2.10 percent, to 1,393.64. The Nasdaq Composite Index <.IXIC> gained 64.21 points, or 2.21 percent, to 2,973.98.

The ECB indicated on Thursday it may start buying government bonds again to reduce crippling borrowing costs for Spain and Italy, but Draghi indicated that any intervention would not come before September.

Spain inched closer to seeking a sovereign bailout on Friday, but Prime Minister Mariano Rajoy said he needed first to know the conditions as well as the form any European Union rescue would take. The pace of growth in the vast services sector edged up in July as new orders gained, but a measure of employment fell to its lowest level in nearly a year, according to an industry report released on Friday.

The S&P 500 index had fallen more than 1.5 percent in the past four sessions as investor hopes for central bank stimulus measures faded and a trading error at market maker Knight Capital Group Inc on Wednesday dealt another blow to confidence in market structure.

Knight Capital shares rose 27.1 percent to $3.28 as the company fought for survival after a $440 million trading loss caused by a software glitch. The embattled market maker has obtained a credit line, helping its shares to regain some ground. Securities regulators are looking into the events surrounding the trading glitch.

"I think market participants are maybe feeling a little better about Knight, and that there may be a good exit strategy for them in terms of something happening for them over the weekend. You don't want your largest market maker declaring bankruptcy," said Mendelsohn.

Dow component Procter & Gamble Co advanced 3.5 percent to $65.73 after the world's largest household products maker posted a higher-than-expected quarterly profit and said it would repurchase $4 billion worth of its shares this fiscal year.

LinkedIn Corp jumped 11.9 percent to $105.36 after the professional networking site reported higher-than-expected revenue and raised its full-year outlook as it pocketed more money from subscribers, services aimed at businesses and advertising.

NYSE Euronext said new strategies and cost cuts should help the trans-Atlantic exchange return to growth next year after losses in its three main business lines reduced quarterly income by one-fifth.

According to Thomson Reuters data, of the 402 companies in the S&P 500 that have reported second-quarter earnings through Friday morning, 68 percent have beaten analysts' expectations, which is consistent with the past four quarters.

(Reporting by Anna Louie Sussman; Editing by Kenneth Barry)