(Refiles to fix headline to read "July payroll data")
* Financials lead gains; JPMorgan and AIG soar
* Homebuilders advance after results, analyst upgrade
* Dow up 1.6 pct, S&P 500 up 1.8 pct, Nasdaq up 1.7 pct * For up-to-the-minute market news click STXNEWS/US (Updates to early afternoon, changes byline)
By Ryan Vlastelica
NEW YORK, Aug 7 (Reuters) - U.S. stocks advanced on Friday after stronger-than-expected non-farm payroll data lifted investor optimism and pushed the S&P 500 to a 10-month high.
The data boosted stocks across the board, with the financial sector the best-performing group on the S&P. The S&P financial sector index rose 4 percent to 195.50, while the KBW Banks index surged 5.1 percent to 46.14.
Dow components Bank of America Corp added 1.6 percent to $16.96, and JPMorgan Chase & Co gained 5.7 percent to $43.10.
The U.S. unemployment rate fell in July for the first time in 15 months as employers cut 247,000 jobs, the government said, fewer than expected.
"It's all about the employment report today. Wall Street has been fixated on it, and the reaction is strong," said Fred Dickson, market strategist at D.A. Davidson in Lake Oswego, Oregon.
"Investors are looking for confirmation that the bottom is close, and employment is a big piece of it. ISM (Institute for Supply Management) is another piece, and put that together with durable goods and housing and the mosaic is slowly filling in that the economy is beginning to stabilize. That's exactly what investors are looking for," he added.
The Dow Jones industrial average jumped 146.76 points, or 1.59 percent, at 9,403.25. The Standard & Poor's 500 Index was up 17.47 points, or 1.75 percent, at 1,014.53. The Nasdaq Composite Index rose 33.74 points, or 1.71 percent, at 2,007.37.
American International Group Inc surged 19.4 percent to $26.90 after posting its first quarterly profit in seven quarters.
AIG's stronger-than-expected results reassured investors that the embattled insurer, rescued by U.S. taxpayers during the financial crisis, was showing signs of life. At Thursday's close, the stock was up nearly 70 percent since the beginning of the week.
The housing sector also advanced, with the Dow Jones U.S. Home Construction index up 7 percent to 292.23.
The move came a day after Beazer Home USA Inc reported a third-quarter loss that was narrower than expected, and after Goldman Sachs added D.R. Horton Inc to its "conviction buy" list.
Beazer shares soared 20 percent to $3.97, while D.R. Horton climbed 9.1 percent to $13.69.
CIT Group Inc gained 1.9 percent to $1.65 after it reported progress on its restructuring plans and said it had suspended payment of preferred dividends and completed a drawdown of its $3 billion secured credit facility.
Among Nasdaq advancers, graphics chipmaker Nvidia Corp rose 5.5 percent to $13.84 a day after it forecast third-quarter revenue above expectations.
The broad S&P 500 is now up 49.7 percent from its 12-year closing low in early March, driven by a string of economic data that has suggested a recovery, and along with a majority of S&P 500 companies topping consensus in their quarterly results.