(Corrects implied expectations of rate hikes in paragraph 5 and removes link to Feb 19 story)
* Crude prices up less than 1 pct, off session highs
* Q4 GDP increased at 1 pct annual rate
* J.C. Penney jumps after results
* Indexes up: Dow 0.08 pct, S&P 0.17 pct, Nasdaq 0.16 pct
By Abhiram Nandakumar
Feb 26 (Reuters) - Wall Street pared early gains on Friday after stronger-than-expected U.S. GDP and consumer spending data raised the likelihood of the Federal Reserve hiking interest rates sooner than expected.
Fourth-quarter gross domestic product increased at a 1 percent annual rate instead of the previously reported 0.7 percent pace. The economy grew at a rate of 2.0 percent in the third quarter.
U.S. crude prices, a major stock market driver this year, also gave up most of their early gains and were up less than 1 percent.
The U.S. Federal Reserve raised rates in December and Chair Janet Yellen has hinted at a gradual increase through 2016 if data shows the economy is strong enough to withstand a move away from near-zero rates.
Federal funds futures implied traders see a 36-percent chance of the Fed raising rates in June and a 53-percent chance in December, both above Thursday's levels, according to CME Group's FedWatch program.
A rate hike increases borrowing costs, but banks benefit from higher interest income.
The S&P financial sector provided the biggest boost to the S&P 500. Goldman Sachs was the biggest influence to the Dow with a 1.4 percent rise, while Bank of America's 4.5 percent increase helped lift the S&P 500.
The sector has been the worst performer among the 10 major S&P sectors this year on worries about banks facing defaults from oil and gas companies.
"We've been low on oil for so long that stable or slightly higher oil price is viewed positively as a stabilizing effect on the economy and stock market," said Mark Spellman, portfolio manager at Alpine Funds in New York.
At 12:38 p.m. ET (1738 GMT), the Dow Jones industrial average was up 12.57 points, or 0.08 percent, at 16,709.86, the S&P 500 was up 3.23 points, or 0.17 percent, at 1,954.93 and the Nasdaq Composite index was up 7.52 points, or 0.16 percent, at 4,589.73.
Five of the 10 major S&P sectors were higher. The materials sector rose 1.54 percent, while utilities fell the most, declining 2.32 percent.
In other U.S. data, consumer spending rose strongly in January, while underlying inflation picked up by the most in four years.
Shares of J.C. Penney were up 12.1 percent at $9.38 after the department store operator reported better-than-expected revenue.
Baidu was up 9.4 percent at $173.15 after the Chinese Interest search firm posted better-than-expected quarterly results. The stock gave the biggest boost to the Nasdaq.
Advancing issues outnumbered decliners on the NYSE by 2,011 to 977. On the Nasdaq, 1,751 issues rose and 903 fell.
The S&P 500 index showed 21 new 52-week highs and no new lows, while the Nasdaq recorded 37 new highs and 37 new lows. (Reporting by Abhiram Nandakumar in Bengaluru; Editing by Saumyadeb Chakrabarty)