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US STOCKS-Wall Street gains as dour services data raises rate-cut expectations

Noel Randewich

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* Sept. ISM services sector activity falls more than expected

* Data boosts bets of interest rate cut in Oct.

* PepsiCo rises after quarterly beat

* Indexes: Dow +0.30%, S&P 500 +0.64%, Nasdaq +0.97% (Updates to afternoon)

Oct 3 (Reuters) - Wall Street climbed on Thursday after data showing services-sector activity at a three-year low fueled expectations that the Federal Reserve would cut interest rates to stem a wider economic downturn.

Microsoft rose 1.2% and Facebook added 2.7%, the two contributing more than any other companies to the S&P 500's gain.

The market dropped after the Institute for Supply Management (ISM) said its non-manufacturing activity index fell to a reading of 52.6 in September, the lowest since August 2016.

That added to fears sparked on Tuesday when a report showed U.S. factory activity contracted to its lowest level in more than a decade, as well as data on Wednesday showing private payrolls growth in August was not as strong as previously estimated.

But stock prices bounced back from the dour economic data as bets on a third U.S. rate cut this year at Fed's October policy meeting surged to 90% from 40%, according to CME Group's Fed Watch tool.

"The degradation of the data, especially the non-manufacturing data, kind of pushes the Fed to another cut," said Kim Forrest, chief investment officer at Bokeh Capital Partners in Pittsburgh.

Traders are now again expecting at least four rate reductions by the end of 2019, which they had abandoned after the central bank described each of its last two rate cuts as a "mid-cycle adjustment."

"We are at a critical point. Global growth is slowing and U.S. growth is decelerating because of trade disputes and uncertainty caused by trade policy," said Ben Phillips, chief investment officer at EventShares. "But the market loves easy money, and when it gets a whiff of it, it gets high."

Investors now await a pivotal jobs report on Friday for more signs of whether the U.S.-China trade war is pushing the world's largest economy toward a recession.

The three main stock indexes recorded their deepest one-day percentage slide in six weeks on Wednesday, with each of them losing 3% over the last two sessions.

At 2:07 pm ET, the Dow Jones Industrial Average was up 0.3% at 26,158.04 points, while the S&P 500 gained 0.64% to 2,906.04.

The Nasdaq Composite added 0.97% to 7,860.58.

PepsiCo Inc rose 3.9% after beating quarterly expectations as higher advertising and new low-calorie versions of Gatorade boosted demand for its beverages in North America.

Its shares pushed the consumer staples sector 1.0% higher. Ten of the 11 major sectors were up.

Losses in the interest-rate sensitive U.S. lenders pulled the financial sector down 0.2%.

Corona maker Constellation Brands Inc fell 5.4% after it took a $839 million mark down in the value of its investment in pot firm Canopy Growth during the quarter.

Advancing issues outnumbered declining ones on the NYSE by a 1.44-to-1 ratio; on Nasdaq, a 1.35-to-1 ratio favored advancers.

The S&P 500 posted nine new 52-week highs and 20 new lows; the Nasdaq Composite recorded three new highs and 102 new lows.

(Additional reporting by Medha Singh and Arjun Panchadar in Bengaluru; Editing by Cynthia Osterman)