* Payrolls better than expected
* ISM shows services sector slowing
* Dow up 0.9 pct, S&P up 0.9 pct, Nasdaq up 1 pct (Updates early afternoon midday)
By Edward Krudy
NEW YORK, Sept 3 (Reuters) - Wall Street was set to close out its best week in six on Friday after recent economic data, including a stronger-than-expected jobs report, showed the U.S. economy may be in better shape than thought.
The risk aversion of the summer months, which had pressured stocks, showed signs of lessening. The S&P 500 has gained almost 5 percent in the last three days. Treasury prices have eased, while the U.S. dollar dipped as investors moved out of safe-havens.
An August non-farm payrolls report that showed fewer job losses than forecast was the latest data to help lift gloom over Wall Street. But the optimism was checked after another report showed growth in the U.S. services sector eased to its slowest pace since the start of the year.
"Absolute caution needs to continue, and we're going to have more choppiness," said Christian Wagner, chief investment officer at Longview Capital Management in Wilmington, Delaware. "I think that if we end up close to break-even for the year that'll be great."
The Dow Jones industrial average gained 88.14 points, or 0.85 percent, to 10,408.24. The Standard & Poor's 500 Index gained 10.14 points, or 0.93 percent, to 1,100.24. The Nasdaq Composite Index gained 21.60 points, or 0.98 percent, to 2,221.61.
Stocks sold off sharply over the summer due to concerns that the U.S. economy may be headed for a double-dip recession. But a report that showed the manufacturing sector grew more than expected in August sparked a rally on Wednesday that helped stocks to their best day in eight weeks.
This week's move has helped the S&P 500 work off some of its nearly oversold condition as its relative strength index, or RSI, moves into neutral territory around the 56.5 mark.
RSI compares recent gains and losses and helps determine if a security or an index is under- or overvalued.
"If these (jobs) numbers would have been last week, I don't think it would have had a positive influence," said Alan B. Lancz & Associates, an investment advisory firm in Toledo, Ohio. "It's one step forward phase, after going backward."
The S&P has risen 3.5 percent so far this week but is still down about 10 percent from a yearly high in April.
U.S. employment fell for a third straight month in August, the Labor Department said on Friday. But the loss of 54,000 non-farm jobs was far less than the 100,000 expected by economists polled by Reuters, and private hiring surprised on the upside.
However, that was tempered by the ISM non-manufacturing report that showed the vast U.S. services sector grew in August at its slowest pace since January.
There was some support on the corporate front. Take-Two Interactive Inc jumped 8 percent to $9.56 a day after the video game maker's quarterly profit smashed Wall Street's expectations of a loss, and it raised its forecast.
However, Campbell Soup Co shed 3.5 percent to $36 after posting lower-than-expected quarterly sales and forecasting growth below its long-term target as it grapples with a weak economy.
Celldex Therapeutics Inc sank 25.5 percent to $3.55 after Pfizer Inc ended a co-development deal on Celldex's lead product, a cancer vaccine.
In contrast, shares of Dow component Pfizer were unchanged at $16.40. (Reporting by Edward Krudy; Additional reporting by Rodrigo Campos; Editing by Kenneth Barry)