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* U.S. manufacturing sector expands, lifting stocks
* Blue-chips GE, IBM, Travelers hit new 52-week highs
* Tech drags on Nasdaq
* Dow up 0.6 pct, S&P up 0.3 pct, Nasdaq down 0.1 pct
By Angela Moon
NEW YORK, Oct 1 (Reuters) - Wall Street started a new quarter with a modest rally on Monday, lifted by a surprising expansion in U.S. manufacturing in September.
After rising more than 1 percent by midday, the major U.S. stock indexes came off their highs, with the Nasdaq the hardest-hit. Market participants said Wall Street has shown signs of fatigue as stocks closed a strong third quarter on Friday.
"We are at a level where the market is due for a correction. Also, as we head for a new earnings season here, we should expect more volatility ahead," said Tim Ghriskey, chief investment officer of Solaris Asset management in Bedford Hills, New York.
Among stocks weighing on the Nasdaq, Apple, the world's most valuable publicly traded company, lost 1.2 percent to $659.39, dragging the tech-heavy index lower.
Baidu Inc shares fell 3.5 percent to $112.77 after Jefferies cut the stock to "hold" from "buy" and lowered the price target to $125 from $135.
Besides tech, sectors associated with growth were strong. Financial stocks rose, with Goldman Sachs Group up 2.8 percent at $116.86 after the weekly Barron's said Goldman's stock could rise at least 25 percent in the next year as capital markets improve. An S&P index of financial stocks advanced 0.5 percent.
A number of blue-chip stocks hit 52-week highs, helping the Dow outperform the broader market. Shares of General Electric rose 0.4 percent to $22.81, after rising as high as $22.99 earlier. IBM also hit a new 52-week high at $211.75 and The Travelers Co rose as high as $69.48 earlier in the session. IBM shares closed up 1.5 percent at $210.47. The Travelers shares gained 1.2 percent to $69.07.
The Dow Jones industrial average rose 77.98 points, or 0.58 percent, to 13,515.11 at the close. The Standard & Poor's 500 Index advanced 3.82 points, or 0.27 percent, at 1,444.49. The Nasdaq Composite Index dipped 2.70 points, or 0.09 percent, to close at 3,113.53.
After a strong morning session, stocks trimmed earlier gains and the Nasdaq briefly turned negative as Fed Chairman Ben Bernanke defended the U.S. central bank and its ultra-loose monetary policy as it aims to reduce unemployment.
Stimulative measures from the Federal Reserve and the European Central Bank helped the S&P 500 finish the quarter up 5.8 percent, its best third quarter since 2010.
While his speech was more of a reiteration of the Fed's stance, some market participants said the market is getting anxious about the Fed's eventual exit plan.
"He (Bernanke) differentiates money printing and what he claims they are doing by saying money printing is a permanent source of financing for government spending, where he said what the Fed is doing is temporary," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.
"Unwinding their balance sheet and normalizing the fed funds rate will be highly disruptive," he said.
Discount retailer Gordmans Stores Inc said it could miss analysts' profit estimates for the first time since it went public in 2010. The stock slumped 23 percent to $14.20.
On the economic front, U.S. manufacturing expanded in September for the first time since May as new orders and employment picked up, an Institute for Supply Management report showed. The ISM data eased concerns about the economy and offset a gloomier outlook in Asia and Europe.
The ISM's index rose to 51.5 in September from 49.6 in August, topping expectations for a reading of 49.7, according to a Reuters poll.
The U.S. data followed surveys in the euro zone that showed manufacturing slackened in the three months to September while Asia's factories are continuing to struggle in the face of tepid demand from the United States and Europe.
About 6.3 billion shares changed hands on the New York Stock Exchange, Amex and Nasdaq, compared with the average daily volume of 6.38 billion.
Advancers outnumbered decliners on the New York Stock Exchange by a ratio of about 3 to 2. And although the Nasdaq ended slightly lower, the breadth was definitely positive with about seven stocks rising for every five that fell.