* U.S. non-farm payrolls surge in October
* Shares of financials lead gainers
* Stocks: Dow, Nasdaq down 0.2 pct, S&P up 0.1 pct (Updates to midday)
By Caroline Valetkevitch
NEW YORK, Nov 5 (Reuters) - U.S. stocks were little changed on Friday as stronger-than-expected U.S. job gains in October were offset by profit-taking after the market rallied to two-year highs.
Financial shares led gainers on speculation big banks would increase dividend payments, while telecommunications shares had the biggest losses.
This week's rally came in the wake of the Federal Reserve's announcement Wednesday to buy $600 billion in government bonds to help the ailing economy.
Investors questioned how long the rally could continue after the week's market-bullish events.
"The stock market has been relatively good this week, so maybe some sectors are taking a pause," said Thomas Villalta, portfolio manager for Jones Villalta Asset Management in Austin, Texas. The S&P 500 is up 3.2 percent so far for the week.
But the employment gains bode well for the months ahead when consumer spending takes center stage during the holiday shopping period, he said.
"The employment situation comes on top of what were fairly good retail sales figures for October, so those two, hand in hand, are painting a picture that would seem to support the assertion that this will be at least an OK holiday season."
The Dow Jones industrial average was down 19.26 points, or 0.17 percent, at 11,415.58. The Standard & Poor's 500 Index was up 1.27 points, or 0.10 percent, at 1,222.33. The Nasdaq Composite Index was down 4.06 points, or 0.16 percent, at 2,573.28.
Many retailers posted stronger-than-expected sales on Thursday when the Dow and S&P 500 hit their highest levels since September 2008 and the Nasdaq rose to its highest since January 2008. The S&P 500 now is up about 16 percent since the end of August.
Republican gains in the U.S. midterm election on Tuesday added to bullish sentiment in stocks, as investors viewed the change as positive for profit growth.
On Friday, the S&P telecommunications and health care sectors led the downdraft, with losses of 0.8 percent and 0.7 percent, respectively.
"Taking profits has been the wrong move for a while. There's a lot of liquidity out there. Earnings have been strong and many stocks are still reasonably priced, so it's a fairly good environment for equities given the fact that a lot of other asset choices are relatively more expensive," said Sasha Kostadinov, portfolio manager at Shaker Investments in Cleveland.
Financials substantially outperformed other sectors, with the S&P financial index advancing 1.8 percent. The Fed is expected to soon allow some healthy banks to increase dividend payments, people familiar with the decision said late Thursday.
Shares of Bank of America shot up 3.5 percent to $12.55.
Boosting optimism about the economy, U.S. employment jumped by much more than expected last month, with private companies hired workers at the fastest pace since April, the government report showed.
The strength of the report even raised questions about whether the Fed was too aggressive in its move to keep the economy growing.
"That employment report was really good today. Is there justification to buy $900 billion (in total) in debt?," Villalta said.
"I don't think it hurts for the Fed to be doing what they're doing if it acts as an insurance policy that we're on track," he said. The unemployment rate remained high at 9.6 percent in Friday's report, signaling the labor market still has far to go, he added. (Reporting by Caroline Valetkevitch; Editing by Kenneth Barry)