US STOCKS-Wall St rallies, Republicans to offer short-term hike in debt limit

* CBOE Volatility index plunges 12 percent

* U.S. jobless claims at 6-month high but trend improving

* Indexes up: Dow 1.21 pct, S&P 1.25 pct, Nasdaq 1.50 pct

By Angela Moon

NEW YORK, Oct 10 (Reuters) - U.S. stocks rallied on Thursday, with major stock indexes rising more than 1 percent on signs of progress in negotiations to raise the U.S. debt limit just a week before a deadline.

House of Representatives Republicans said they would propose legislation for a short-term debt limit increase to avoid a U.S. debt default. House Speaker John Boehner said the short-term debt limit increase is conditioned on an offer by Democrats to start negotiations on fiscal issues.

The CBOE Volatility index VIX, often used to measure the level of investor anxiety, plunged more than 12 percent to 17.17.

President Barack Obama and congressional leaders are set to meet Thursday for further discussions.

"Hopes amongst investors are growing that a thaw is starting to make its presence felt," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York.

"Thinking back to December 2012 when the fiscal cliff was fast approaching, investor confidence was repeatedly battered following a series of meetings that failed to hammer a positive outcome. Bottomline, we'll believe it when we see it."

A partial U.S. government shutdown has continued 10 days after congressional Republicans refused to pass a budget for the new fiscal year without an attachment to defund Obama's healthcare overhaul.

U.S. Treasury Secretary Jack Lew said the gridlock in Washington was hurting the U.S. economy, and urged Congress to raise a cap on government borrowing to keep America from defaulting on its debt.

The Dow Jones industrial average was up 191.76 points, or 1.30 percent, at 14,994.74. The Standard & Poor's 500 Index was up 21.88 points, or 1.32 percent, at 1,678.28. The Nasdaq Composite Index was up 56.30 points, or 1.53 percent, at 3,734.07.

Data showed the number of Americans filing new claims for jobless aid touched a six-month high last week as a computer-related backlog of claims was processed and a partial U.S. government shutdown began to hit some non-federal workers.

This year's high-flying tech stocks - such as Facebook Inc , up 3.2 percent at $48.28, and Amazon.com Inc, up 2.3 percent at $305 - rebounded after several days of declines.

The Nasdaq 100 technology sector was up 1.1 percent after having shed 2.8 percent over the last three sessions, its biggest three-day drop since late June.

Best Buy Co Inc shares jumped 7.6 percent to $39.00 in heavy volume early on Thursday. The electronics retailer is about to launch a trade-in promotion program where customers can swap an old smartphone for a $100 gift card that can be used to buy the new Apple iPhone 5s and 5c.

Citrix Systems Inc shares were off 11 percent at $59.06 after the cloud computing software maker estimated quarterly results below analysts' expectations as businesses delayed contracts.