* U.S. economy adds 223,000 jobs in May vs est. 188,000
* Unemployment rate falls to 3.8 pct
* Costco down after results
* Financials biggest pct gainer on S&P 500
* Indexes up: Dow 0.91 pct, S&P 0.81 pct, Nasdaq 0.84 pct (Updates to open)
By Medha Singh
June 1 (Reuters) - U.S. stocks rose on Friday led by bank stocks as a stronger-than-expected jobs report for May locked in expectations of an interest rate hike by the Federal Reserve this month.
Nonfarm payrolls increased by 223,000 jobs in May, the Labor Department said, while the average hourly earnings rose 0.3 percent after edging up 0.1 percent in April.
Economists polled by Reuters had forecast jobs increasing by 188,000 jobs and a 0.2 percent rise in wages.
The data showed a drop in the unemployment rate to an 18-year low of 3.8 percent, pointing to rapidly tightening labor market conditions.
The benchmark U.S. Treasury yield climbed to the session peaks of 2.926 percent. U.S. two-year yields also touched the day's peak of 2.488 percent.
The S&P financial index rose 1.4 percent, with shares of big U.S. banks gaining between 1.5 percent and 1.7 percent.
"The really good news for markets is the average hourly earnings continues to be very steady and does not signal a buildup in inflationary pressures, so overall a very solid report," said Michael Arone, chief investment strategist at State Street Global Advisors in Boston.
Markets got a reprieve overnight as Italy's anti-establishment parties revived coalition plans, removing the risk of a repeat vote dominated by debate over the country's future in the euro zone.
However, investors are keeping an eye out on developments around trade after Washington on Thursday imposed steel and aluminum tariffs on Canada, Mexico and EU.
Canada and Mexico retaliated with duties on U.S. goods ranging from orange juice to pork. The European Union was looking to tax bourbon whiskey and Harley motorcycles after on the countries.
"A better economy means potentially higher interest rates and trade wars mean potentially lower demand. The market is still trying to figure out if all the outside trade noise is just noise, in which case we are still on a good economic path," said Rick Meckler, Cherry Lane Investments, A Family Investment Office In New Vernon, New Jersey.
"Or is it something more meaningful that will eventually interrupt what has been a really long bull market."
At 9:51 a.m. EDT the Dow Jones Industrial Average was up 223.10 points, or 0.91 percent, at 24,638.94, the S&P 500 was up 21.96 points, or 0.81 percent, at 2,727.23 and the Nasdaq Composite was up 62.42 points, or 0.84 percent, at 7,504.54.
Nine of the 11 major S&P indexes were higher.
Trade sensitive stocks Boeing rose 1.5 percent, while Caterpillar was up 1.3 percent.
Among other stocks, warehouse club operator Costco fell 1.2 percent in premarket trading as higher freight costs dented its quarterly gross margins.
Shares of cosmetics retailer Ulta Beauty dropped 3.4 percent after its second-quarter profit and sales forecast missed analysts' estimates.
Advancing issues outnumbered decliners by a 3.11-to-1 ratio on the NYSE and by a 2.81-to-1 ratio on the Nasdaq.
The S&P index recorded nine new 52-week highs and two new lows, while the Nasdaq recorded 79 new highs and nine new lows. (Reporting by Medha Singh in Bengaluru; Editing by Arun Koyyur)