Stocks climbed on Friday as investors focused on the bright side of a mixed payrolls report that showed smaller-than-expected job cuts in August but also an unemployment rate that hit a 26-year high.

The market was relatively flat in morning trade before sharply rising around noon, with all major indexes gaining around 1 percent.

Yes, the unemployment rate was a little worse than expected, but the wild card was the non-farm payrolls, which came out better than forecast, said Robert Francello, head of equity trading for Apex Capital in San Francisco.

It's providing relief as we get near the close, and some people are covering shorts here before the long weekend.

Declines in payrolls for August were the smallest in a year, but the unemployment rate rose to a level not reached since June 1983, according to the Labor Department. Wall Street views a rebound in the labor market as a key component to an economic recovery.

Analysts also said the reduced trading volumes before the U.S. Labor Day holiday weekend from the smaller number of investors could add to volatility. As of 2:42 p.m., only 621.8 million shares had changed hands on the New York Stock Exchange, well below last year's estimated daily average of 1.49 billion.

The Dow Jones industrial average <.DJI> was up 69.60 points, or 0.74 percent, at 9,414.21. The Standard & Poor's 500 Index <.SPX> gained 9.53 points, or 0.95 percent, at 1,012.77. The Nasdaq Composite Index <.IXIC> was up 26.81 points, or 1.35 percent, at 2,010.01.

Gains were broad-based, with industrials and technology shares leading the charge. Caterpillar Inc , a Dow component, gained 2.1 percent to $45.97.

Semiconductor stocks rose after Intel Corp's chief executive said aging personal computers and Microsoft's launch of Windows 7 will prompt companies to start spending on PCs next year. Intel was up 0.9 percent at $19.60.

Shares of memory chip developer Rambus Inc rose 8.9 percent to $17.35 on speculation that rival Samsung Electronics <005930.KS> would buy the company for $25 to $27.50 per share.

The PHLX semiconductor index <.SOXX> rose 2.3 percent.

Novellus rose 2.2 percent to $19.50 after the semiconductor manufacturing tool maker lifted its forecasts for the current quarter.

Among financial stocks, shares of mortgage fund providers Fannie Mae and Freddie Mac rose on news that they had regained compliance with New York Stock Exchange share listing rules, reviving their respectability among investors.

Fannie Mae gained 6.7 percent to $1.75 and Freddie Mac rose 3.7 percent to $1.94.

(Editing by Padraic Cassidy)

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