US STOCKS-Wall St rally fades ahead of key jobs data

* ECB hints at prolonging bond-buying program

* Nasdaq briefly turns negative, Apple (NasdaqGS: AAPL - news) biggest drag

* Joy Global (NYSE: JOY - news) falls after slashing full-year forecast

* Indexes up: Dow 0.38 pct, S&P 0.40 pct, Nasdaq 0.03 pct (Updates to open)

By Tanya Agrawal

Sept 3 (Reuters) - Wall Street's early rally faded in afternoon trading on Thursday as investors appeared to turn cautious ahead of a key U.S (Other OTC: UBGXF - news) . jobs report, which is expected to figure in the Federal Reserve's decision on when to lift interest rates.

The market rose sharply earlier in the day after European Central Bank chief Mario Draghi hinted at more stimulus measures in the wake of lower oil prices, weaker growth in China and a strengthening euro.

Draghi's remarks come a day ahead of the monthly U.S. nonfarm payrolls data, which is expected to show that the economy added 220,000 nonfarm jobs in August, up from 215,000 in July.

The Fed, which meets on Sept. 16-17, has said it will raise rates when it sees sustained economic recovery. But while the labor market has strengthened, inflation remains below the Fed's 2 percent target.

"The payrolls number is critical and if the data is good then a September rate hike will be in play," said Tim Rudderow, chief investment officer at Mount Lucas, an investment management firm which oversees $1.7 billion.

"A rate hike is positive for the market which needs a shot of confidence."

Near-zero rates allowed the U.S. stock market stage a spectacular bull-run since the financial crisis. But the market was rocked by volatility in the past two weeks, triggered by fears of slowing growth in China.

Some investors have said the volatility, which left the S&P 500 with its biggest monthly drop in three years in August, may force the Fed to delay a rate hike until the end of the year.

The CBOE Volatility index, known as Wall Street's "fear gauge", fell 3.7 percent to 25.14 on Thursday, slightly above the long-term average of 20. The index had spiked as much as 53.29 early last week.

At 13:25 ET (1725 GMT), the Dow Jones industrial average was up 61.73 points, or 0.38 percent, at 16,413.11, while the S&P 500 was up 7.75 points, or 0.4 percent, at 1,956.61.

The Nasdaq composite was up 1.55 points, or 0.03 percent, at 4,751.53. The index briefly turned negative as stocks pared their earlier gains.

Nine of the 10 major S&P sectors were higher, with the telecommunications index's 0.98 percent rise leading the advancers.

Apple was the biggest drag on S&P 500 and the Nasdaq with a 1.4 percent drop.

Joy Global's shares were down 16 percent at $18.60 after the mining equipment maker reported a fall in quarterly profit and cut its full-year forecast.

Caterpillar (NYSE: CAT - news) also fell 2.6 percent and the was the biggest drag on the Dow.

Five Below (NasdaqGS: FIVE - news) fell 8.2 percent to $34.90 after the teen apparel retailer's third-quarter forecast disappointed expectations.

Advancing issues outnumbered decliners on the NYSE by 1,982 to 973. On the Nasdaq, 1,535 issues rose and 1,192 fell.

The S&P 500 index showed no new 52-week highs and one new low, while the Nasdaq recorded 28 new highs and 30 new lows. (Reporting by Tanya Agrawal; Editing by Saumyadeb Chakrabarty)