* May payrolls increase by 280,000 vs est 225,000
* Average hourly earnings increase
* Traders betting Fed will start raising rates in Oct
* Indexes: Dow down 0.04 pct, S&P up 0.04 pct, Nasdaq up 0.16 pct (Adds details, changes comment and updates prices)
By Tanya Agrawal
June 5 (Reuters) - U.S. stocks were mixed in choppy trading on Friday after data showed that U.S. job growth rose sharply in May and wages picked up, signs of momentum in the economy that revived expectations of an interest rate hike in September.
The strong jobs data indicated that growth was gaining traction, but Wall Street took a dim view as a rate hike could increase the cost of borrowing.
Traders are now betting the Fed will start raising interest rates as soon as October, and will make a second increase early next year.
The Fed has kept overnight rates near zero since December 2008 and the economy’s sluggishness had raised doubts the Fed would be able to raise rates this year.
Bolstered by cheap credit, the U.S. stock market is trading at record levels but has stayed within a narrow trading range as investors look for more clarity on the economy.
Nonfarm payrolls increased by 280,000 last month, the biggest gain since December, and above the 225,000 that economists polled by Reuters had expected. Average hourly earnings grew by eight cents.
The dollar extended gains against a basket of currencies after the jobs data, while yields on 10-year U.S. Treasuries surged to their highest since October.
“I expect the Federal Reserve to hike this year, probably in September,” said Mohamed El-Erian, chief economic adviser at Allianz in Newport Beach, California.
“It would do so in the context of the ‘loosest tightening’ in the modern history of central banks: a very shallow path, highly conditional and a terminal point below historical averages.”
At 11:24 a.m. ET the Dow Jones industrial average was down 6.81 points, or 0.04 percent, at 17,898.77, the S&P 500 was up 0.86 points, or 0.04 percent, at 2,096.7 and the Nasdaq Composite was up 8.33 points, or 0.16 percent, at 5,067.45.
Eight of the 10 major S&P 500 sectors were lower, with the utilities index leading the losses with a 1.18 percent drop. Energy and financials were the only sectors in positive territory.
The Federal Reserve Bank of New York President William Dudley speaks before the Economic Club of Minnesota in Minneapolis at 12:40 p.m. ET (1640 GMT). Investors will keep an eye on the speech for his take on the monthly jobs data.
European shares were on track for their worst week of the year as a losing streak for bonds rumbled on and with wary investors anticipating more debt drama over Greece.
Wal-Mart inched down 0.4 percent at $73.85 after the company elected Vice Chairman Greg Penner as chairman, replacing family scion Rob Walton.
Zumiez dropped 18.7 percent to $24.18 as it estimated current-quarter profit and revenue below analysts’ expectations.
Declining issues outnumbered the advancers on the NYSE by 1,757 to 1,193, for a 1.47-to-1 ratio on the downside. On the Nasdaq, 1,351 issues rose and 1,209 fell for a 1.12-to-1 ratio favoring advancers.
The S&P 500 index showed 16 new 52-week highs and five new lows while the Nasdaq recorded 58 new highs and 34 new lows. (Editing by Saumyadeb Chakrabarty)