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

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Airlines gain as U.S. flights slowly resume after FAA outage

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Bed Bath & Beyond extends gains

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Indexes up: Dow 0.6%, S&P 500 0.9%, Nasdaq 1.3%

NEW YORK, Jan 11 (Reuters) - U.S. stocks climbed in afternoon trading on Wednesday, led by gains in the Nasdaq as investors were optimistic ahead of an inflation report that could give the Federal Reserve room to dial back on its aggressive interest rate hikes.

The much-anticipated report due on Thursday is projected by economists polled by Reuters to show U.S. consumer prices likely grew 6.5% year-on-year in December, moderating from a 7.1% rise in November.

Most S&P 500 sectors were higher, with real estate up the most followed by consumer discretionary.

Stocks have risen in recent sessions, helped by hopes that the Fed could soon pause its cycle of rate hikes, even as comments by some Fed officials have supported the view that the central bank needs to remain aggressive in raising interest rates to fight inflation.

"Investors are anticipating that we're closer to a pause than at any other point last year," said Jake Dollarhide, chief executive officer of Longbow Asset Management in Tulsa, Oklahoma. He said that would be welcomed by the market.

The Dow Jones Industrial Average rose 196.99 points, or 0.58%, to 33,901.09, the S&P 500 gained 36.81 points, or 0.94%, to 3,956.06 and the Nasdaq Composite added 136.19 points, or 1.27%, to 10,878.82.

Money market participants see a 75% chance the Fed will raise the benchmark rate by 25 basis points in February.

This week also marks the start of the fourth-quarter earnings season for S&P 500 companies, with overall S&P 500 earnings expected to have declined year-over-year.

Wall Street's biggest banks, which kick off the season later this week, are expected to report lower quarterly profits amid risks of a recession due to monetary policy tightening.

Retailer Bed Bath & Beyond Inc jumped despite bleak quarterly results, with some investors speculating it could be a potential acquisition target.

Shares of airlines such as American Airlines Group Inc and Spirit Airlines Inc were higher. U.S. flights were slowly beginning to resume departures and a ground stop was lifted after the Federal Aviation Administration scrambled to fix a system outage overnight.

Advancing issues outnumbered declining ones on the NYSE by a 3.34-to-1 ratio; on Nasdaq, a 2.13-to-1 ratio favored advancers.

The S&P 500 posted 11 new 52-week highs and 1 new lows; the Nasdaq Composite recorded 78 new highs and 16 new lows. (Reporting by Caroline Valetkevitch; Additional reporting by Shubham Batra and Amruta Khandekar in Bengaluru; Editing by Shounak Dasgupta and Grant McCool)