US STOCKS-Wall St rises on Wachovia deal, bailout hopes

* Financials rise on Wachovia deal, bank bailout hope

* House starts debate on $700 billion rescue

* Credit market tightness persists worldwide

* Market unruffled by weak Sept jobs report

* Dow up 1.6 pct, S&P 500 up 2.2 pct, Nasdaq up 2.3 pct (Updates to midmorning)

By Ellis Mnyandu

NEW YORK, Oct 3 (Reuters) - U.S. stocks rose on Friday as Wells Fargo's proposed takeover of troubled U.S. bank Wachovia Corp lifted financial shares and the House of Representatives began deliberations on a plan to stabilize financial markets.

Investors bet the House, which earlier this week rejected the legislation, would pass a revised version of a $700 billion bailout to stabilize the U.S. financial sector. A top Republican leader was optimistic the deal would pass. A vote is expected later on Friday.

The deal between Wells-Fargo, one of the strongest U.S. banks left, and Wachovia was a stock transaction valued at more than $16 billion. It scuppered a deal announced on Monday and backed by the government for Citigroup to buy parts of Wachovia.

"The Wachovia deal I think gave some optimism to the market that someone is stepping in to buy Wachovia," said Giri Cherukuri, head trader at OakBrook Investments LLC in Lisle, Illinois. "I also think the bailout is going to go through. It could be a very big embarrassment if the House votes it down twice."

The Dow Jones industrial average .DJI climbed 165.11 points, or 1.58 percent, to 10,647.96. The Standard & Poor's 500 Index .SPX gained 24.78 points, or 2.22 percent, to 1,139.06. The Nasdaq Composite Index .IXIC shot up 46.14 points, or 2.33 percent, to 2,022.86.

The market was unfazed by a government report showing the number of U.S. jobs lost in September was the greatest in 5-1/2 years. Signs in another report that growth in the vast services sector held up in September offered encouragement.

Shares of Wachovia, which had been hit with mortgage-related losses, jumped 74.2 percent to $6.81 on the New York Stock Exchange, while the S&P financial index climbed 2.5 percent.

Other standouts on the financial front were Goldman Sachs , up 5.6 percent at $138.94 and Bank of America , up 4.2 percent at $37.91. But shares of Citigroup declined almost 10 percent to $20.25.

On Nasdaq shares of Apple Inc jumped more than 4 percent to $104.69, making the stock a top boost, after the iPod and iPhone maker denied an Internet report claiming that Chief Executive Steve Jobs had a heart attack. Earlier, Apple had dropped as much as 5 percent.

The Labor Department said employers cut payrolls, slashing an unexpectedly large 159,000 jobs as employment contracted for a ninth straight month.

The Institute for Supply Management said its non-manufacturing index rose slightly to 50.2.

The $700 billion financial sector bailout is designed to mop up bad mortgage debts on the banks' balance sheets in a bid to loosen up lending to boost economic growth. (Editing by Kenneth Barry)