US STOCKS-Wall St up on factory data, China; financials lead

* Financials lead: Citigroup, Bank of America, AIG up

* Factory data, China rebound offset weak jobs report

* Stocks up: Dow 0.5 pct, S&P 0.8 pct, Nasdaq up 0.75 pct

* For up-to-the-minute market news, click STXNEWS/US (Updates to mid-afternoon, changes byline)

By Angela Moon

NEW YORK, Aug 20 (Reuters) - U.S. stocks advanced modestly on Thursday with financial stocks leading gains after encouraging U.S. manufacturing data and a rebound in Chinese stocks reassured investors.

The optimism was enough to overshadow a disappointing employment report showing weekly jobless claims increased for a second week.

Financial stocks contributed the most to the market's rise, with Citigroup up 7.75 percent at $4.45 after an analyst said some investors are betting the share price will triple in three years.

AIG Inc surged 18.66 percent to $31.66 after newly appointed Chief Executive Robert Benmosche told Bloomberg the bailed-out insurer may be able to repay its federal debts and boost value for shareholders. Please see [ID:nN20484709]

Bank of America gained 2.15 percent to $17.11

"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.

"Investors see financials as having been beaten down too bad, too fast... They link financials stocks with economic recovery, so they want to see the shares move higher."

The S&P Financial sector index <.GSPF> was up 2.35 percent, widely outperforming other sectors, and the KBW Bank index <.BKX> was up 2.62 percent.

Shortly before 3 p.m. EDT, the Dow Jones industrial average <.DJI> was up 46.93 points, or 0.51 percent, at 9,326.09. The Standard & Poor's 500 Index <.SPX> was up 8.06 points, or 0.81 percent, at 1,004.52. The Nasdaq Composite Index <.IXIC> was up 14.08 points, or 0.71 percent, at 1,983.32.

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.

Shares of Heinz rose 1.6 percent to $38.56, while Hormel, maker of Spam processed meat, gained 0.7 percent to $37.50.

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 3.8 percent to $460.70 on Nasdaq. [ID:nBNG514815]