Wall Street hangs in as jobs data fuels Fed hope

NEW YORK (Reuters) - Disappointing jobs growth was not enough to knock the benchmark S&P 500 off a four-year high on Friday, as the poor figures boosted optimism that the Federal Reserve will act to stimulate the economy next week.

The nonfarm payrolls report, which showed job growth of only 96,000 last month, came a day after bold action by Europe to stem the debt crisis drove the S&P to its highest close since January 2008. The Dow ended at its best level since the end of 2007 while the Nasdaq hit a 12-year high.

The payrolls data fell short of expectations for 125,000 new jobs, particularly after a slew of strong readings on the labor market on Thursday, setting the stage for the Fed to pump additional money into the sluggish economy next week.

The combination of poor economic fundamentals and hopes for central bank action left many investors in a cautious waiting mode, a trend that is likely to continue until the Federal Open Market Committee's (FOMC) policy meeting on September 12-13.

"I think the market doesn't really know what to do. What I suspect will happen is, for the rest of today and all through Monday and Tuesday, the market is just going to probably go sideways in anticipation of that FOMC meeting," said Randy Frederick, managing director of active trading and derivatives for Charles Schwab in Austin, Texas.

In a market that has seen little volatility of late, the S&P 500 posted its strongest one-day percentage gain since June on Thursday, rising 2 percent.

Intel Corp cut its third-quarter revenue estimate and withdrew its full-year forecast, saying demand for its chips declined as customers reduced inventory and businesses bought fewer personal computers. Shares of the world's largest chipmaker fell 3.4 percent to $24.23.

The Dow Jones industrial average <.DJI> dropped 8.50 points, or 0.06 percent, to 13,283.50. The Standard & Poor's 500 Index <.SPX> gained 4.13 points, or 0.29 percent, to 1,436.25. The Nasdaq Composite Index <.IXIC> fell 0.42 point, or 0.01 percent, to 3,135.39.

Semiconductor shares fell after Intel's warning, with the PHLX semiconductor index <.SOX> down 1.1 percent. The S&P materials sector index <.GSPM> rose 1.8 percent as gold prices hit a six-month high on increased likelihood of Fed easing.

The jobs report showed the unemployment rate dropped to 8.1 percent from 8.3 percent in July, but it was largely due to Americans giving up the search for work.

"We believe the economy is in much worse shape than is commonly believed," said Peter Cook, chief investment officer at Performance Trust Investment Advisors, LLC in Chicago.

"The earnings are showing that the economy is slowing. However, there are many, many investors who appear to believe that continued monetary stimulus will keep the stock market up even though there's deterioration in the underlying fundamental economy."

Shares of Pandora Media Inc fell 17 percent to $10.46 following media reports that Apple Inc was in talks to license music for a radio service like the one Pandora operates.

The Wall Street Journal, citing people familiar with the matter, reported that Apple wants to license music for a custom-radio service that would work on its hardware, such as the iPhone, iPads and Mac computers, in a bid to expand its dominance in online music. Apple's iTunes is the largest music retailer.

(Editing by Dave Zimmerman)