* JPMorgan posts first loss since 2004, a blow to Dimon
* Markets encouraged by bipartisan talks in Washington
* CBOE Volatility index falls to 15-level
* Indexes up: Dow 0.5 pct; S&P 0.4 pct; Nasdaq 0.6 pct
By Angela Moon
NEW YORK, Oct 11 (Reuters) - U.S. stocks extended gains onFriday, a day after their biggest rally in more than nine monthsas investors were hopeful for a solution to end the partialgovernment shutdown that would stave off a possible U.S.default.
One motivation for Friday's buyers was the chance anagreement could come over the weekend. The Senate is expected tovote over the weekend on extending the federal borrowing limitthrough January 2015.
President Barack Obama and congressional Republican leadersworked to end their fiscal impasse on Friday, but struggled tostrike a deal on the details for a short-term reopening of thefederal government and an increase in the U.S. debt limit.
"People don't want to be short going into a weekend,especially if a deal does get done," said Dennis Dick,proprietary trader at Bright Trading LLC in Las Vegas.
The partial shutdown is now in its eleventh day and lessthan a week remains before an Oct. 17 deadline to extend thegovernment's borrowing authority and avoid a debt default.
All S&P sectors were up except consumer staples, which fellslightly. Energy stocks led the S&P 500, up 1 percentafter the Environmental Protection Agency proposed lowering therequired amount of ethanol to be blended into U.S. gasolineafter Thursday's market close.
The CBOE Volatility index VIX, Wall Street'sso-called fear gauge, fell 4.1 percent to 15.80, the lowest innearly two weeks.
"This rally will provide opportunity to modify positioning,as we expect fundamentals to matter more as the credit cycleturns," said Peter Cecchini, managing director at CantorFitzgerald in New York, in a note to clients.
The Dow Jones industrial average was up 75.24 points,or 0.50 percent, at 15,201.31. The Standard & Poor's 500 Index was up 7.18 points, or 0.42 percent, at 1,699.74. TheNasdaq Composite Index was up 23.80 points, or 0.63percent, at 3,784.55.
JP Morgan Chase & Co, the biggest U.S. bank byassets, reported a rare quarterly loss after incurring $9.2billion in legal expenses. Its shares seesawed throughout thetrading session, and were down 0.2 percent at $52.39 in lateafternoon.
Wells Fargo & Co, the biggest U.S. mortgage lender,reported a 13 percent rise in third-quarter profit, but itsmortgage banking income fell sharply as the refinancing boombegan to fade. Wells Fargo was down 0.4 percent to $41.26.
Apparel chain Gap was down 6.6 percent to $36.86 aday after reporting net sales were flat compared with last year.
The Thomson Reuters/University of Michigan index of consumersentiment fell in October to its weakest in nine months and was below expectations.
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