Stocks rallied, driving the Standard & Poor's 500 Index to a 10-month high on Friday after a stronger-than-expected jobs report added to recent data pointing to an economic recovery.

The July employment data boosted stocks across the board, with financial shares leading the charge. The S&P financial sector index <.GSPF> rose 3.7 percent. JPMorgan Chase & Co shot up 5 percent to $42.78 and led the Dow higher.

One of the weakest links in the economy has been employment. The data today was (strong) enough to trigger enthusiasm, said Craig Peckham, equity trading strategist at Jefferies & Co in New York.

What this means is that consumer spending will be up and others (sectors) will come along as well.

The nonfarm payrolls data showing fewer-than-expected job cuts in July comes on the heels of strong readings on housing and manufacturing earlier this week.

The first profit in seven quarters for American International Group Inc also lifted financial stocks as the insurer's shares jumped 19.2 percent to $26.86.

AIG's profit news reassured investors that the company, 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 Dow Jones industrial average <.DJI> was up 134.90 points, or 1.46 percent, at 9,391.16. The Standard & Poor's 500 Index <.SPX> was up 16.20 points, or 1.62 percent, at 1,013.28. The Nasdaq Composite Index <.IXIC> was up 31.34 points, or 1.59 percent, at 2,004.50.

Before the opening bell, the Labor Department said U.S. employers cut 247,000 nonfarm jobs in July -- far less than the 320,000 expected and the smallest decline in a year, suggesting the recession was abating.

The July unemployment rate slipped to 9.4 percent from 9.5 percent in June, the first time the rate has fallen since April 2008.

The hard-hit housing sector got another boost after shares of Beazer Home USA Inc soared nearly 18 percent to $3.90 a day after reporting a third-quarter loss that was much narrower than expected.

Goldman Sachs also added U.S. home builder D.R. Horton Inc to its conviction buy list, saying the company is best positioned to benefit from the approaching expiration of the federal housing stimulus. D.R. Horton's stock gained almost 8 percent to $13.53.

The Dow Jones U.S. Home Construction Index <.DJUSHB> shot up 6.2 percent.

CIT Group Inc rose 3.7 percent to $1.68 after the troubled lender reported progress on its restructuring plans. It suspended payment of preferred dividends and said it had completed a drawdown of its $3 billion secured credit facility.

Among the Nasdaq's advancers, graphics chipmaker Nvidia Corp added 4.9 percent to $ 13.76 a day after reporting a smaller quarterly loss. Nvidia also gave a third-quarter sales outlook 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 numbers suggesting a recovery, and an earnings season with most S&P 500 companies beating expectations.

(Reporting by Angela Moon; Editing by Jan Paschal)