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* Sept. ISM services sector activity falls more than expected
* Data boosts bets of interest rate cut in Oct.
* PepsiCo rises after quarterly beat
* Indexes up: Dow 0.25%, S&P 0.53%, Nasdaq 0.82% (Updates to early afternoon)
By Medha Singh and Arjun Panchadar
Oct 3 (Reuters) - Wall Street's main indexes rose in volatile trading on Thursday as U.S. services sector activity slowed to a three-year low, fueling hopes of further easing in monetary policy by the Federal Reserve to stem a wider economic downturn.
Technology stocks Apple Inc and Microsoft Corp were among the biggest boost to the three indexes.
The indexes dropped about 1% after ISM's non-manufacturing activity index for September fell to 52.6 from 56.4 the month before and below expectations of 55.0. Still, a reading above 50 denoted an expansion in the sector.
But they bounced back as bets of a third U.S. rate cut this year at Fed's October policy meeting surged to 90.3% from 39.6%, according to CME Group's Fed Watch tool.
Traders are now again expecting at least four rate reductions by the end of 2019, which they had abandoned after the central bank described each of its last two rate cuts as a "mid-cycle adjustment."
"The degradation of the data, especially the non-manufacturing data, kind of pushes the Fed to another cut," said Kim Forrest, chief investment officer at Bokeh Capital Partners in Pittsburgh.
"This is very familiar to the post-2008 world where we get bad news and the market rallies because we are anticipating a rate cut."
Investors now await a pivotal jobs report on Friday after dismal manufacturing and hiring data raised fears of the U.S.-China trade war pushing the world's largest economy into a recession.
The three indexes recorded their deepest one-day percentage slide in six weeks on Wednesday, with each of them losing 3% over the last two sessions.
That pushed the benchmark index 4% below its all-time high hit in July even though it came within striking distance of that level two weeks ago.
Investors seem torn between growing evidence of a sharp domestic slowdown that have stoked fears of a global recession and hopes that these data-points would convince the Fed to cut borrowing costs further.
At 13:00 ET (1700 GMT), the Dow Jones Industrial Average was up 66.22 points, or 0.25%, at 26,144.84 and the S&P 500 was up 15.40 points, or 0.53%, at 2,903.01. The Nasdaq Composite was up 64.05 points, or 0.82%, at 7,849.29.
PepsiCo Inc rose 4.1% after beating quarterly expectations as higher advertising and new low-calorie versions of Gatorade boosted demand for its beverages in North America.
Its shares pushed the consumer staples sector 1.0% higher. Ten of the 11 major sectors were trading higher.
Losses in the interest-rate sensitive U.S. lenders pulled the financial sector down 0.27%.
Leading the decliners on the S&P 500 was Corona maker Constellation Brands Inc, which fell about 5.7% as it took a $839 million mark down in the value of its investment in pot firm Canopy Growth during the quarter.
Advancing issues outnumbered decliners by a 1.18-to-1 ratio on the NYSE and a 1.12-to-1 ratio on the Nasdaq.
The S&P index recorded nine new 52-week highs and 20 new lows, while the Nasdaq recorded three new highs and 94 new lows.
(Reporting by Medha Singh and Arjun Panchadar in Bengaluru; Editing by Arun Koyyur)