* Zynga shares slide after warning, Facebook slips
* Sprint could counterbid on PCS -sources
* Investors eye Q3 earnings next week
* Indexes up: Dow 0.4 pct, S&P 0.3 pct, Nasdaq flat
By Edward Krudy
NEW YORK, Oct 5 (Reuters) - The Dow Jones industrial average climbed to its highest level in nearly 5 years on Friday after an unexpected drop in the unemployment rate pointed to an improving economy.
The S&P 500 rose for a fifth day and was also on course to close near a five-year high. The index has gained nearly 17 percent so far this year and is on track for its best yearly run since 2009 when stocks rebounded after the financial crisis.
But the indexes were off their highs of the day in afternoon trading, suggesting the market may struggle to make further progress with third-quarter earnings season starting next week.
Labor Department data showed the jobless rate dropped by 0.3 percentage point in September to 7.8 percent, its lowest since January 2009. Investors focused on a survey of households that pointed to a big surge in hiring.
"What this suggests at the end of the day is that demand in the United States will hold up reasonably well," said Kevin Caron, market strategist at Stifel, Nicolaus & Co in Florham Park, New Jersey.
And with hiring still well below full recovery levels the employment data also leaves the door open to more stimulus from the Federal Reserve. "It wasn't so strong that it upset the apple cart for those that are looking for additional easing by the central banks," said Caron.
The Dow Jones industrial average gained 55.87 points, or 0.41 percent, to 13,631.23. The Standard & Poor's 500 Index gained 4.52 points, or 0.31 percent, to 1,465.92. The Nasdaq Composite Index gained 1.18 points, or 0.04 percent, to 3,150.64.
Much of the market's gains this year have been due to easy monetary policies. The improvement in U.S. hiring last month is one bright spot as manufacturing around the world has been showing signs of softness in recent months.
A separate survey of business establishments showed employers added 114,000 jobs to their payrolls last month while data for July and August was revised to show 86,000 more jobs created than previously reported.
"The household employment jumped up strongly. That's an important move. These are not government jobs. It's an impressive number," said Robbert van Batenburg, head of global research at Louis Capital Markets in New York.
Zynga shares plummeted 19.1 percent to $2.27 after it slashed its 2012 outlook for a second time, fanning doubts about the games maker's ability to shore up its dwindling earnings.
Facebook, which derives more than a tenth of its revenue from fees paid by Zynga, saw its shares fall 2.5 percent to $21.40.
Investors turn their attention to the start of the third-quarter earnings season next week. S&P 500 earnings are expeceted to drop more than 2 percent in the quarter compared with a year earlier, according to Thomson Reuters data. The decline would be the first since 2009.
Alcoa Inc kicks off earnings on Tuesday and is expected to show zero earnings per share compared to 15 cents a year ago. The shares rose 0.2 percent to $9.09 on Friday.
Sprint Nextel is considering making a rival bid for MetroPCS Communications, which agreed Wednesday to a merger with Deutsche Telekom's T-Mobile USA, according to people familiar with the situation.
Sprint Nextel rose 3 percent to $5.25, while MetroPCS gained 1.2 percent to $12.84.