US STOCKS-Wall St dips as jobs report stronger than expected

* May payrolls increase by 280,000 vs est 225,000

* Average hourly earnings increase

* Indexes down: Dow 0.32 pct, S&P 0.33 pct, Nasdaq 0.51 pct (Updates to open)

By Tanya Agrawal

June 5 (Reuters) - U.S. stocks slipped on Friday after data showed that U.S. job growth accelerated sharply in May and wages picked up, signs of momentum in the economy that could revive expectations of an interest rate hike in September.

Nonfarm payrolls increased by 280,000 last month, the largest gain since December, and above the 225,000 that economists polled by Reuters had expected. Average hourly earnings grew by eight cents.

The better-than-expected jobs report signaled that growth was gaining traction, but Wall Street took a dim view as a potential rate hike could increase the cost of borrowing.

Bolstered by cheap credit, the U.S. stock market is trading at record levels but has stayed within a narrow trading range as investors look for more clarity on the economy.

The Fed has kept overnight rates near zero since December 2008 and the economy's sluggishness had left markets doubting whether the Fed would be able to raise rates this year.

The dollar extended gains against a basket of currencies after the jobs data, while yields on 10-year U.S. Treasuries surged to their highest since October.

"I think the report is a nice confirmation that the U.S. economy is still a winner coming out of a weak winter based on other factors," said Luke Tilley, chief economist at Wilmington Trust.

At 9:43 a.m. ET the Dow Jones industrial average was down 57.59 points, or 0.32 percent, at 17,847.99, the S&P 500 was down 6.96 points, or 0.33 percent, at 2,088.88 and the Nasdaq Composite was down 26.03 points, or 0.51 percent, at 5,033.09.

Eight of the 10 major S&P 500 sectors were lower, with the utilities index leading losses with a 1.24 percent drop.

The Federal Reserve Bank of New York President William Dudley speaks before the Economic Club of Minnesota in Minneapolis at 12:40 p.m. ET (1640 GMT). Investors will keep an eye on the speech for his take on the monthly jobs data.

European shares were on track for their worst week of the year as a losing streak for bonds rumbled on and with wary investors anticipating more debt drama over Greece.

Greece delayed a payment to the International Monetary Fund as Prime Minister Alexis Tsipras demanded changes to tough terms from international creditors for aid to stave off default. Tsipras is set to address the Greek parliament at 11:00 a.m. ET.

JA Solar shares jumped 13.6 percent to $9.18 after receiving a takeover offer from Chief Executive Baofang Jin that values that company at about $489 million.

Wal-Mart inched down 0.5 percent at $73.73 after the company elected Vice Chairman Greg Penner as chairman, replacing family scion Rob Walton.

Zumiez (NasdaqGS: ZUMZ - news) dropped 15.5 percent to $25.24 as it estimated current-quarter profit and revenue below analysts' expectations.

Declining issues outnumbered the advancers on the NYSE by 2,312 to 476, for a 4.86-to-1 ratio on the downside. On the Nasdaq, 1,647 issues fell and 629 advanced for a 2.62-to-1 ratio favoring decliners.

The S&P 500 index showed 10 new 52-week highs and five new lows while the Nasdaq recorded 26 new highs and 21 new lows. (Editing by Saumyadeb Chakrabarty)