* Chinese stocks recover, boosting U.S. market * Weekly initial jobless claims up for second week * Factory activity in U.S. Mid-Atlantic turns positive * Dow up 0.5 pct, S&P 500 up 0.8 pct, Nasdaq up 0.7 pct (Updates to midday, changes byline)
By Rachel Chang
NEW YORK, Aug 20 (Reuters) - U.S. stocks rose on Thursday after a rebound in Chinese equities and a surprising expansion in U.S. regional manufacturing offset weekly jobless claims that increased for a second week.
The rally overnight in China's stock market, which had fallen as much as 20 percent in the last two weeks, helped ease fears about a key driver of the global economy.
The Shanghai Composite Index finished Thursday's session with a gain of 4.5 percent. For the year, it's now up 60 percent.
The U.S. earnings picture was mixed as packaged food makers H.J. Heinz Co and Hormel Foods Corp both beat Wall Street's estimates while retailer Sears Holding Corp reported an unexpected loss, sending its stock down 10.8 percent on Nasdaq.
"The markets are thinking that Chinese growth and the success of (fiscal) stimulus in China is going to be very important for global recovery," said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto. That's why the more sentiment-driven Shanghai bourse is being watched closely by U.S. investors, he said.
AIG Inc shares surged 21.2 percent to $32.46 on the NYSE after newly appointed Chief Executive Robert Benmosche said he expects the bailed-out insurer to be able to repay its federal debts and boost value for shareholders, according to a report by Bloomberg News.
The KBW Insurance index rose 1.6 percent.
The Dow Jones industrial average advanced 42.32 points, or 0.46 percent, to 9,321.48. The Standard & Poor's 500 Index climbed 7.69 points, or 0.77 percent, to 1,004.15. The Nasdaq Composite Index rose 13.53 points, or 0.69 percent, to 1,982.77.
Shares of Heinz, known for its ketchup, rose 1.6 percent to $38.56, while Hormel, whose best-known product may be the canned processed meat called Spam, gained 0.4 percent to $37.38.
Factory activity in the U.S. Mid-Atlantic region turned positive in August, breaking a 10-month run of contraction, helped by a jump in new orders, a survey by the Philadelphia Federal Reserve Bank showed.
"Right now, manufacturing numbers take precedence over everything else, (because they) give insight as to whether inventory replenishment is kicking in (as we approach) the back end of the year," said Michael Church, president of Addison Capital Management in Philadelphia.
But initial claims for state unemployment insurance benefits rose 15,000, according to the Labor Department. Economists polled by Reuters forecast a drop in new claims.
U.S. mortgage delinquency rates continued to climb in the second quarter, while the percentage of loans that entered the foreclosure process dipped, the Mortgage Bankers Association said.
Goldman Sachs added Google Inc to its Americas Conviction Buy list and raised its price target on the stock to $560. Google rose 3.4 percent to $458.83 on Nasdaq.
On Friday, investors will take in remarks from Federal Reserve Chairman Ben Bernanke, scheduled to speak to a gathering in Jackson Hole, Wyoming, on the lessons learned from the financial crisis and efforts to aid the economic recovery. (Reporting by Rachel Chang; Editing by Jan Paschal)