* Sept nonfarm payrolls up by 142,000 vs 203,000 expected
* Unemployment rate unchanged at 5.1 pct
* Banks fall as chance of rate hike this year recedes
* Indexes up: Dow 0.48 pct, S&P 0.47 pct, Nasdaq 0.67 pct (Updates to early afternoon)
By Tanya Agrawal
Oct 2 (Reuters) - U.S. stocks turned positive in afternoon trading on Friday as a rally in health care and energy stocks outweighed early worries about the economy after a disappointing jobs report.
The three major indexes fell more than 1.5 percent in initial reaction to the September payrolls report but more than clawed back those early losses by midday.
Nonfarm payrolls rose by 142,000, far less than the 203,000 economists had expected, and August and July figures were revised down. But the jobless rate held at 5.1 percent.
The report, the last before the Federal Reserve's meeting at the end of October, appeared to belie Fed Chair Janet Yellen's comment last week that the economy was strong enough to withstand a rate hike this year.
"The uncertainty has certainly increased," said Art Hogan, chief market strategist at Wunderlich Securities in New York.
However, he said there was no one catalyst for the intraday volatility. "There has been a bounce in biotechs, which have been oversold, and that's helped things today."
Kate Warne, an investment strategist at Edward Jones in St. Louis, said the jobs data did not necessarily point to a faltering economy.
"The underlying strength in consumer spending is likely to continue to push growth at about the 2 percent pace we've seen throughout the six years of the expansion," she said.
U.S. interest rates futures rose sharply after the jobs report. Odds of a December rate hike fell to a little over 27 percent from 44 percent before the report.
Fed Vice Chair Stanley Fischer is scheduled to speak in Boston at 1:30 p.m ET (1730 GMT).
With the third-quarter earnings season starting next week, investors are starting to factor in what is likely to be the biggest decline in earnings for S&P 500 companies in six years.
At 13:22 p.m. ET, the Dow Jones industrial average was up 78.8 points, or 0.48 percent, at 16,350.81, the S&P 500 was up 9.12 points, or 0.47 percent, at 1,932.94 and the Nasdaq composite index was up 30.80 points, or 0.67 percent, at 4,657.88.
Banks, which would benefit from higher interest rates, were among the biggest losers. JPMorgan Chase's 1.3 percent fall weighed the most on the Dow, while Bank of America was the biggest drag on the S&P with a drop of 2.2 percent.
Eight of the 10 major sectors were higher, with the energy index's 1.3 percent rise leading the advancers. Oil prices also recovered after early weakness.
Chevron was up 2.3 percent, ConocoPhillips 3.4 percent and Exxon 0.6 percent.
The S&P 500 and the Nasdaq closed slightly higher on Thursday in a choppy start to the fourth quarter, while the Dow was slightly down.
Advancing issues outnumbered decliners on the NYSE by 1,792 to 1,213. On the Nasdaq, 1,550 issues rose and 1,161 fell.
The S&P 500 index showed two new 52-week highs and 56 new lows, while the Nasdaq recorded nine new highs and 180 new lows.
Reporting by Tanya Agrawal; Additional reporting by Abhiram Nandakumar; Editing by Savio D'Souza and Saumyadeb Chakrabarty