U.S. stocks closed higher on Friday as investors focused on the bright side of a mixed payrolls report that showed smaller-than-expected job cuts in August, although the unemployment rate 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.

Gains were broad-based, with technology shares leading the charge. 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 1.1 percent at $19.64 and Microsoft closed at $$24.62, up 2.1 percent, both in Nasdaq trading.

The PHLX semiconductor index <.SOXX> rose 2.7 percent.

Novellus rose 2.9 percent to $19.63 after the semiconductor manufacturing tool maker lifted its forecasts for the current quarter.

The Dow Jones industrial average <.DJI> climbed 96.66 points, or 1.03 percent, to end at 9,441.27. The Standard & Poor's 500 Index <.SPX> gained 13.16 points, or 1.31 percent, to 1,016.40. The Nasdaq Composite Index <.IXIC> rose 35.58 points, or 1.79 percent, to close at 2,018.78.

But for the week, the Dow was down 1.1 percent, the S&P 500 was off 1.2 percent and the Nasdaq lost 0.5 percent due to a sharp sell-off in the first three days of the week.

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.

Shares of memory chip developer Rambus Inc shot up 11.4 percent to $17.75 on Nasdaq on speculation that rival Samsung Electronics <005930.KS> would buy the company for $25 to $27.50 per share.

International Business Machines Corp shares helped lead the Dow industrials' advance, rising 1 percent to $117.46 on the New York Stock Exchange.

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

Fannie Mae gained 7.9 percent to $1.77 and Freddie Mac rose 5.4 percent to $1.97.

Analysts said the reduced trading volumes before the U.S. Labor Day holiday weekend, with more investors taking the day off, added to volatility. Only 1.02 billion shares changed hands on the New York Stock Exchange, well below last year's estimated daily average of 1.49 billion.

On the Nasdaq, about 1.74 billion shares traded, also below last year's daily average of 2.28 billion.

Advancing stocks outnumbered declining ones on the NYSE by a ratio of 4 to 1. On the Nasdaq, about three stocks rose for every one that fell.

(Editing by Jan Paschal)