* Nonfarm payrolls up by 223,000, just below the 224,000 expected
* Unemployment rate falls to lowest since May 2008
* S&P 500, Dow on track for best day since March
* Microsoft jumps on news it's not pursuing Salesforce
* Indexes up: Dow 1.45 pct, S&P 1.2 pct, Nasdaq 1.2 pct (Adds details, changes comment, updates prices)
By Tanya Agrawal
May 8 (Reuters) - Wall Street extended its gains in late morning trading on Friday after strong jobs data for April pointed to a pickup in the economy, which could prompt the Federal Reserve to raise interest rates only later in the year.
U.S. job growth rebounded in April, with nonfarm payrolls increasing by 223,000, just below the 224,000 that economists polled by Reuters had expected.
The unemployment rate dropped to its lowest level since 2008, despite more people entering the job market, suggesting underlying strength in the economy at the start of the second quarter after growth hit a soft patch in the first.
"The jobs report really managed to thread the needle," said Tony Roth, chief investment officer of Wilmington Trust in Wilmington, Delaware, which oversees $78 billion.
"The Fed is almost duty bound to raise rates this year, but I don't think it will be in June. I think September is more likely."
The drop in the unemployment rate to 5.4 percent pushed it to within a whisker of the 5.0 percent to 5.2 percent range that most Fed officials consider consistent with full employment.
However, March payrolls were revised downwards to show only 85,000 jobs created, the smallest since June 2012, while average hourly earnings in April remained stuck in the range it has been in for the past few years.
"The downward revision received for the previous month suggested that the labor market isn't really accelerating," said Emanuella Enenajor, senior North America economist at Bank of America Merrill Lynch Global Research.
At 11:02 a.m. ET (1502 GMT), the Nasdaq Composite added 57.50 points, or 1.16 percent, to 5,003.05.
The Dow Jones industrial average rose 259.58 points, or 1.45 percent, to 18,183.64, on track for its best day since March 30.
The S&P 500 gained 25.9 points, or 1.24 percent, to 2,113.9, on track for its best performance since mid-March.
All the three indexes were set to close in the black for the week after choppy trading sessions in the past few days.
All 30 Dow components were higher, while all the 10 major S&P 500 sectors notched strong gains, led by a 1.7 percent jump in the materials index.
Microsoft jumped 2.1 percent to $47.68 after Reuters reported that the company was currently not weighing an offer for Salesforce.com. Salesforce.com fell 2.5 percent to $72.64.
McDonald's rose 1.9 percent to $98.68 after it reported a lower-than-expected fall in worldwide sales at its established restaurants in April.
AOL jumped 11.3 percent to $43.83 after reporting revenue above analysts' expectations.
Advancing issues outnumbered decliners on the NYSE by 2,399 to 546, for a 4.39-to-1 ratio on the upside; on the Nasdaq, 1,730 issues rose and 845 fell for a 2.05-to-1 ratio favoring advancers.
The S&P 500 was showing 18 new 52-week highs and one new low; the Nasdaq notched 51 new highs and 23 new lows. (Editing by Savio D'Souza)