* Factory data, China rebound encourage recovery hopes
* Financials advance; Citi, AIG surge
* Dow up 0.8 pct, S&P 500 up 1.1 pct, Nasdaq up 1 pct (Updates to close)
By Angela Moon
NEW YORK, Aug 20 (Reuters) - U.S. stocks rose for a third straight session on Thursday with financial stocks leading gains after U.S. manufacturing data and a rebound in Chinese stocks reassured investors.
The Dow and the S&P 500, which suffered their worst day in about seven weeks on Monday, got a lift from signs of improvement in U.S. Mid-Atlantic manufacturing and China's stock market reversing its 20 percent drop in the last two weeks. The S&P 500 is now up about 49 percent from its 12-year closing low set on March 9.
The positive manufacturing data from the Federal Reserve Bank of Philadelphia offset the market's disappointment that weekly jobless claims increased for a second week.
"Just the fact that the more important jobless claims were overshadowed by the manufacturing data and rebound overseas shows how much optimism there is in the market now," said Dan Faretta, a senior market strategist at Lind-Waldock in Chicago.
Financial stocks contributed the most to the market's rise, with Citigroup up 8.5 percent at $4.48 after veteran bank analyst Richard Bove said some investors are betting the stock's price will triple in three years.
AIG Inc surged 21.3 percent to $32.30 after newly appointed Chief Executive Robert Benmosche said the bailed-out insurer may be able to repay its federal debts and boost value for shareholders, according to Bloomberg.
"Investors see financials as having been beaten down too bad, too fast ... They link financial stocks with economic recovery, so they want to see the shares move higher."
The Dow Jones industrial average gained 70.89 points, or 0.76 percent, to end at 9,350.05. The Standard & Poor's 500 Index rose 10.91 points, or 1.09 percent, to finish at 1,007.37. The Nasdaq Composite Index climbed 19.98 points, or 1.01 percent, to close at 1,989.22.
The S&P Financial Index was up 2.60 percent, widely outperforming other sectors, and the KBW Bank index gained 2.87 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 11.9 percent to $65.00 on Nasdaq.
Shares of Heinz, known for its ketchup, rose 2 percent to $38.71, while Hormel, the maker of Spam processed meat, gained 0.5 percent to $37.44.
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.
But initial claims for state unemployment insurance benefits rose 15,000, according to the Labor Department. Economists polled by Reuters had forecast a drop in new claims.
Goldman Sachs added Google Inc to its Americas Conviction Buy list and raised its price target on the stock, sending the shares up 3.7 percent to $460.41 on Nasdaq.
On Friday, investors will listen to 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.
Volume was light on the New York Stock Exchange, with 1.05 billion shares changing hands, below last year's estimated daily average of 1.49 billion.
On the tech-heavy Nasdaq, about 1.99 billion shares traded, also below last year's daily average of 2.28 billion.
Advancing stocks outnumbered declining ones on the NYSE by a ratio of 11 to 4. On the Nasdaq, about 17 stocks rose for every nine that fell. (Editing by Jan Paschal)