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* Fed now seen delivering 50 bps hike in September
* U.S. consumer price growth unchanged for July
* Musk sells Tesla shares worth $6.9 bln
* Volatility index hits lowest in over 3 months
* Indexes up: Dow 1.60%, S&P 2.02%, Nasdaq 2.66% (Updates prices, details; adds comment)
By Bansari Mayur Kamdar and Aniruddha Ghosh
Aug 10 (Reuters) - Wall Street's main indexes rose more than 1% on Wednesday after data showing a slower-than-expected rise in inflation in July prompted traders to cut their bets on another super-sized rate hike by the U.S. Federal Reserve.
U.S. consumer prices were unchanged in July due to a sharp drop in the cost of gasoline, delivering the first notable sign of relief for weary Americans who have watched prices climb over the past two years.
Traders are now pricing in a 41.5% chance of a 75-basis-point increase in fund rates at the Fed's next meeting in September, compared with 67.5% before the data.
All the 11 major S&P 500 sectors advanced in mid-day trading, with consumer discretionary, information technology and communication services stocks gaining between 2.5% and 3.0%.
"(Inflation at) 8.5% is still very high, but there is optimism that perhaps June was the peak," said Randy Frederick, vice president of trading and derivatives for Charles Schwab.
However, Frederick warned that producer prices data for July on Thursday, and August's inflation and employment data next month are still pending before the central bank meeting that could alter the course of the Fed again.
The Fed has hiked its policy rate by 225 bps since March despite fears that the sharp rise in borrowing costs could tip the economy into a recession.
At 12:04 p.m. ET, the Dow Jones Industrial Average was up 524.50 points, or 1.60%, at 33,298.91, the S&P 500 was up 83.13 points, or 2.02%, at 4,205.60, and the Nasdaq Composite was up 332.30 points, or 2.66%, at 12,826.23.
After a rough start to the year, the benchmark S&P 500 is up nearly 15% from its mid-June low, largely on expectations the Fed will be less hawkish than anticipated in its efforts to provide a soft landing for the economy.
The CBOE Volatility index, Wall Street's fear gauge, fell below the 20.00 level, hitting its lowest since April.
High-growth and megacap technology stocks, whose valuations are vulnerable to rising bond yields, gained as Treasury yields fell sharply across the board. Apple Inc, Alphabet Inc and Amazon.com Inc rose more than 2% each.
Economy-sensitive banks also advanced 3%, with Goldman Sachs Group Inc and Morgan Stanley climbing 3% each.
"They (investors) are chasing the laggards that haven't participated in the huge run off the June lows," said Thomas Hayes, managing member, Great Hill Capital LLC, New York.
"Banks have underperformed and are now getting bid."
Electric-vehicle maker Tesla Inc gained 2.6% after Chief Executive Elon Musk sold $6.9 billion worth of company shares.
Musk said the funds could be used to finance a potential Twitter Inc deal if he loses a legal battle. Twitter shares rose 3.6%.
Meta Platforms Inc added 6.2% after the Facebook-parent said on Tuesday that it had raised $10 billion in its first-ever bond offering.
Advancing issues outnumbered decliners for a 6.51-to-1 ratio on the NYSE and a 3.42-to-1 ratio on the Nasdaq.
The S&P index recorded five new 52-week highs and 29 new lows, while the Nasdaq recorded 52 new highs and 46 new lows.
(Reporting by Bansari Mayur Kamdar, Aniruddha Ghosh, Sruthi Shankar, Medha Singh and Karina D'Souza in Bengaluru; Editing by Arun Koyyur, Anil D'Silva and Shounak Dasgupta)