US STOCKS-S&P 500, Nasdaq dip; labor market seen tight despite weak payrolls report

(For a Reuters live blog on U.S., UK and European stock markets, click LIVE/ or type LIVE/ in a news window.)

* Nonfarm payrolls rise by 199,000 in December

* GameStop (GME) jumps after report of foray into NFT, crypto markets

* Indexes: Dow up 0.3%, S&P 500 down 0.2%, Nasdaq down 0.7% (Updates to afternoon trading)

By Caroline Valetkevitch

NEW YORK Jan 7 (Reuters) - The S&P 500 and Nasdaq were lower in Friday afternoon trading as technology and growth shares eased as investors remained worried about the U.S. interest rate outlook even after a weaker-than-expected December payrolls report.

Consumer discretionary and and technology sectors led the way lower on the S&P 500, while the S&P 500 financials sector and banking index extended recent gains and hit record highs.

Banks have been helped by rising U.S. Treasury yields. The 10-year yield hit its highest since January 2020, with investors bracing for the potential for earlier-than-expected interest rate hikes from the Federal Reserve.

Friday's Labor Department data showed the U.S. jobs market was at or near maximum employment even though employment rose far less than expected in December amid worker shortages.

It underscored worries over the outlook for rate hikes. Minutes of the Fed's Dec. 14-15 policy meeting published on Wednesday showed officials at the U.S. central bank viewed the labor market as "very tight."

"The investor takeaway is that the labor market continues to be tight despite the headline miss," said Michael Arone, chief investment strategist at State Street Global Advisors in Boston.

"Investors are anticipating that the Fed will raise rates and continue to quantitative tightening. Investors are concerned the Fed will be more aggressive than expected."

The Dow was up slightly, helped by industrial shares.

The Dow Jones Industrial Average rose 96.45 points, or 0.27%, to 36,332.92, the S&P 500 lost 8.09 points, or 0.17%, to 4,687.96 and the Nasdaq Composite dropped 110.21 points, or 0.73%, to 14,970.66.

Investors have been rotating out technology-heavy growth shares and into more value-oriented shares, which they think may do better in a high interest-rate environment.

The S&P 500 energy sector has gained more than 10% so far this week and was set for its best weekly rise in more than one year.

The S&P 500 value index is up 0.4% versus a 0.7% decline in the S&P 500 growth index.

"Meme stock" GameStop Corp (GME) jumped 2.7% after the video game retailer said it is launching a division to develop a marketplace for nonfungible tokens and establish cryptocurrency partnerships. (Reporting by Devik Jain and Shreyashi Sanyal in Bengaluru; Editing by Maju Samuel and David Gregorio)