* July U.S. producer prices rise; industrial output up
* Energy stocks hit as US crude hits 6-1/2-year low
* King Digital, El Pollo Loco slump as results disappoint
* J.C. Penney, Nordstrom rise after strong results
* Indexes: Dow up 0.14 pct, S&P up 0.07 pct, Nasdaq down 0.18 pct (Updates to early afternoon)
By Tanya Agrawal
Aug 14 (Reuters) - The Dow and the S&P 500 eked out marginal gains in afternoon trading on Friday, and were set to post slight gains for the week, as the optimism from strong economic data was tempered by weak oil prices that weighed on energy stocks.
The Nasdaq fell, dragged down by biotech and chip stocks, and was poised to close lower for the week.
U.S. producer prices rose for a third straight month in July, suggesting the drag on inflation from weaker oil prices was easing, while industrial output advanced at its strongest pace in eight months in July.
The data follows optimistic employment and retail sales data for July earlier, which overall suggests the third quarter was off to a healthy start.
The positive data comes at the end of a choppy week during which China devalued its currency, hitting markets and derailing predictions of a rate hike.
Most traders and economists are expecting a September rate hike, but macro concerns have prompted some to argue that the Federal Reserve may wait until December to hike interest rates.
"While the case for a near-term correction in U.S. equity markets is increasingly significant, long-term prospects remain strong," said Andrew Barber, chief market strategist at Eagleview Capital.
"Despite the prospect of rising rates the credit boom that we have lived through since 2008 shows no signs of abating, and this is likely to continue to fuel buybacks and other financial engineering that can keep sending equities higher."
At 12:48 p.m. ET (1648 GMT) the Dow Jones industrial average was up 23.55 points, or 0.14 percent, at 17,431.8, the S&P 500 was up 1.36 points, or 0.07 percent, at 2,084.75 and the Nasdaq composite was down 8.99 points, or 0.18 percent, at 5,024.57.
Six of the 10 major S&P sectors were higher, with the industrials index's 0.5 percent rise leading the advancers.
The energy index was the biggest laggard as U.S. crude oil hit a fresh 6-1/2-year low.
Candy Crush maker King Digital's shares fell 11.8 percent to $13.39 after disappointing bookings numbers.
Restaurant operator El Pollo Loco fell 19.4 percent to $14.79, below its IPO price, after weak quarterly results.
Sysco rose nearly 9 percent to a 52-week high of $41.87 after Nelson Peltz reported a 7 percent stake in food distributor and said he would seek a board seats.
J.C. Penney and Nordstrom both rose 4.5 percent after the department store chains posted better-than-expected quarterly results.
Advancing issues outnumbered decliners on the NYSE by 1,609 to 1,317. On the Nasdaq, 1,343 issues fell and 1,323 advanced.
The S&P 500 index showed 15 new 52-week highs and 11 new lows, while the Nasdaq recorded 41 new highs and 90 new lows. (Reporting by Tanya Agrawal in Bengaluru; Editing by Savio D'Souza)