(Corrects daily percentage gain for S&P in third paragraph and removes reference to S&P in second sentence in same paragraph)
* Investors bet on Fed's stimulus measures extending into 2014
* Morgan Stanley earnings, revenue beat expectations
* Health sector sags on predicted cuts to Medicare
* Indexes up: Dow 0.2 pct, S&P up 0.7 pct, Nasdaq 1.3 pct
NEW YORK, Oct 18 (Reuters) - The S&P 500 closed at a record high for the second straight day on Friday to cap its biggest weekly gain in three months as stronger-than-expected earnings from Google, Morgan Stanley and others overshadowed worry that earnings growth was faltering.
The reassuring signals on profitability augmented investors' relief over the resolution earlier in the week of the budget impasse in Washington that had threatened to trigger a potentially catastrophic default on the U.S. debt.
The S&P 500 closed up 0.7 percent, while the Nasdaq rose 1.3 percent to finish at its highest since 2000. It was the largest daily gain for the Nasdaq in a week.
Google Inc grabbed most of the spotlight, with its shares gaining 13.8 percent to clear the $1,000 mark for the first time, ending the session at $1011.41. Its rise came a day after the search engine company posted results that beat forecasts and helped lead the S&P technology sector to outperform all other sectors with a 1.8 percent rise.
"Washington and everything that happened with the budget talks has cleared out, and we are refocusing on earnings. We have companies coming in next week that you think would beat numbers or do pretty well. That should allow this kind of momentum to continue into next week," said Daniel Morgan, senior portfolio manager at Synovus Trust Company in Georgia.
Morgan said he expects Netflix and Apple, whose earnings reports are due next week, to perform like Google because they are new tech, unlike International Business Machines, which reported low revenue from earnings growth on Thursday.
Should Morgan's view bear out, it could help lift a fairly bleak outlook for third-quarter earnings, which are expected to show year-over-year growth of just 2.1 percent, less than half the second quarter's 4.9 percent and the lowest growth rate in a year.
U.S. stocks caught an updraft beginning Wednesday when it finally became clear that Congress would vote to end a 16-day partial shutdown of the government and extend the federal government's borrowing authority. Republicans seeking to derail President Obama's signature healthcare law had been refusing to lift the statutory debt ceiling, leaving the U.S. Treasury just days from being unable to pay the nation's bills.
The market's rise was also aided by expectations that the Federal Reserve will delay trimming its massive stimulus measures due in no small part to the damage inflicted on the economy by the government shutdown, which ended on Thursday.
"Truthfully most of this is the market pricing in the high likelihood that there will be a continuation of monetary policy through the spring," said Jeff Buetow, chief investment officer at Innealta Capital in Austin, Texas, which manages $3 billion in assets.
The Dow Jones industrial average was up 28.00 points, or 0.18 percent, at 15,399.65. The Standard & Poor's 500 Index was up 11.35 points, or 0.65 percent, at 1,744.50. The Nasdaq Composite Index was up 51.13 points, or 1.32 percent, at 3,914.28.
For the week, the S&P gained 2.4 percent, the Nasdaq gained 3.2 percent, and the Dow Jones industrial average gained 1.1 percent. For the S&P and Nasdaq, it was the largest weekly gain since mid-July.
The temporary resolution of the budget standoff in Washington also prompted the biggest weekly decline in the CBOE Volatility Index in seven months. Wall Street's favored gauge of investor fear fell 17 percent on the week to finish at its lowest end-of-day level in two months.
Health was the only declining S&P sector, down 0.5 percent, on predictions from UnitedHealth that the new healthcare law's provision to decrease private Medicare payments could hurt earnings. UnitedHealth shares fell 3.2 percent to $69.08.
Morgan Stanley shares rose 2.6 percent to $29.71 after the company reported a 50 percent rise in quarterly revenue as higher income from equities sales and trading offset a drop in its fixed-income business.
General Electric said its third-quarter profit and revenue fell as its finance business shrunk, but Wall Street looked beyond those numbers to GE's improving profit margins and growing order demand. GE shares rose 3.6 percent to $25.56.
Of the 98 companies in the S&P 500 that have reported so far, 62.2 percent have topped Wall Street's earnings expectations, just shy of the 63 percent average since 1994 but below the 66 percent beat rate over the past four quarters, according to Thomson Reuters data through Friday.
On revenue, 53.1 percent of the S&P 500 components have beaten expectations, short of the 61 percent rate since 2002 but above the 49 percent beat rate over the past four quarters.
Volume was slightly above average at 5.57 billion total shares traded. (Reporting by Julia Edwards; Editing by Leslie Adler and Kenneth Barry)