US STOCKS-Market up on oil; earnings optimism fizzles late

* Google, Microsoft, Merrill disappoint after the bell

* JPMorgan spurs 2nd-day rally in financials

* Oil drops over $5, easing inflation worry (Adds after-hours declines of Google, Microsoft, Merrill)

By Walter Brandimarte

NEW YORK, July 17 (Reuters) - U.S. stocks soared on Thursday on a sharp drop in oil and several unexpectedly strong earnings reports, but the rally may not hold into Friday, given disappointing results from Google, Microsoft and Merrill Lynch after the bell.

Oil prices fell more than $5, dropping below $130 a barrel for the first time in over a month. The steep decline in oil eased some concerns about the threat of inflation on an already fragile U.S. economy.

Shares of JPMorgan (JPM.N) jumped 13.5 percent in the regular session after the third-largest U.S. bank's profit fell less than expected on resilient stock and bond underwriting revenue. Bank of America Corp (BAC.N) rose nearly 17 percent and Citigroup (C.N) gained over 9 percent.

But in extended trading, Merrill Lynch MER.N shares fell 4 percent to $29.50 after the investment bank posted a much bigger-than-expected quarterly loss.

The disappointment was even bigger in the technology sector, with Google (GOOG.O) and Microsoft (MSFT.O) both missing Wall Street's estimates. S&P 500 and Nasdaq futures fell, pointing to a lower open on Friday.

"For the last two days, we've had some good reports and the market had been starved for some good news, especially from the finance sector," said Keith Wirtz, chief investment officer at Fifth Third Asset Management, in Cincinnati, Ohio.

He added that this positive sentiment in the regular session was overshadowed by the weaker-than-expected results from Google, which set "a negative tone in the aftermarket."

The Dow Jones industrial average .DJI surged 207.38 points, or 1.85 percent, to 11,446.66, in its largest two-day percentage gain since Oct. 15, 2002, when it had a two-day gain of 5.2 percent. The Standard & Poor's 500 Index .SPX rose 14.96 points, or 1.20 percent, to 1,260.32. The Nasdaq Composite Index .IXIC climbed 27.45 points, or 1.20 percent, to 2,312.30.

GOOGLE, MICROSOFT DROP LATE

Even IBM, which posted stronger-than-expected results, was unable to hold on to gains in after-hours trading, given the negative sentiment about the sector. Shares of International Business Machines (IBM.N) fell 1.2 percent to $125 in extended trade. IBM had closed at $126.52, up 0.5 percent.

Google shares fell about 9 percent after the bell to $485.53, while Microsoft shares declined about 4 percent to $26.50.

FANNIE AND FREDDIE FLY, eBAY FALLS