* Nonfarm payrolls up 223,000; jobless rate near 7-yr low
* S&P 500, Dow on track for best day since March
* Microsoft jumps on news it's not pursuing Salesforce
* Indexes up: Dow 1.4 pct, S&P 1.2 pct, Nasdaq 1.1 pct (Updates to mid-afternoon, adds detail on valuations)
By Noel Randewich
May 8 (Reuters) - U.S. stock indexes jumped more than 1 percent on Friday as strong jobs data indicated the U.S. economic growth was picking up momentum, but not enough to raise concerns about an earlier-than-expected interest-rate rise by the Federal Reserve.
U.S. job growth rebounded last month and the unemployment rate dropped to a near seven-year low, suggesting underlying strength in the economy at the start of the second quarter after growth hit a soft patch in the first.
"Right now, the market's been pricing for December and the Fed's been pushing more of a narrative that we think suggests September, so we're more likely to see the Fed converge here to the market than the other way around," said Aaron Kohli, interest rate strategist at BNP Paribas in New York.
Nonfarm payrolls in April increased by 223,000, just below expectations, while the unemployment rate dropped despite more people entering the job market.
However, March payrolls were revised downwards to show only 85,000 jobs created, the least since June 2012.
"The revision to last month is certainly significant. I think this is consistent with most of the data that has been coming out: the economy is slowing a bit, job creation is slowing a little bit," said Uri Landesman, president of Platinum Partners in New York.
At 2:04 p.m., the Dow Jones industrial average rose 258.83 points, or 1.44 percent. The S&P 500 gained 25.89 points, or 1.24 percent, to 2,113.89 and the Nasdaq Composite added 52.85 points, or 1.07 percent, to 4,998.40.
The last time all three indexes closed above 1 percent was on May 1. All three indexes were on track to close up for the week after choppy trading sessions in the past few days.
For six years, ultra-low borrowing costs have fueled stock gains, and market participants have wondered how the U.S. market, which is trading at historically expensive valuations, will fare once the Fed begins raising interest rates.
The S&P 500 is trading at 17 times expected earnings, compared to its 10-year median average of 15, according to Starmine data.
Next week, labor expenses will be a key focus as big retailers, including Macys, Nordstrom Inc and Kohl's Corp post their quarterly results.
On Friday, all the 10 major S&P 500 sectors posted strong gains, led by a 1.8 percent jump in the materials index .
Microsoft jumped 2.1 percent to $47.67 after Reuters reported that the company was not weighing an offer for Salesforce.com. Salesforce.com fell 3.3 percent to $72.01.
AOL jumped 10.4 percent to $43.32 after reporting revenue above analysts' expectations.
Advancing issues outnumbered declining ones on the NYSE by 2,435 to 613, for a 3.97-to-1 ratio; on the Nasdaq, 1,667 issues rose and 1,041 fell for a 1.60-to-1 ratio.
The benchmark S&P 500 index was posting 22 new 52-week highs and 2 new lows; the Nasdaq Composite was recording 68 new highs and 35 new lows. (Additional reporting by Tanya Agrawal; Editing by Bernadette Baum)