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* Weekly jobless claims dip, but still remain high

* U.S. economy contracts in 2020; worst performance since 1946

* Tesla slips after disappointing results

* American Airlines joins retail trading frenzy

* Indexes up: Dow 1.10%, S&P 1.05%, Nasdaq 0.70%

(Updates prices to open)

By Devik Jain and Shreyashi Sanyal

Jan 28 (Reuters) - Wall Street's main indexes rose on Thursday, as a reversal of declines in mega-cap technology stocks helped investors look past data which showed another sharp contraction in the U.S. economy.

Heavyweights including Microsoft Corp , Facebook Inc

, Netflix Inc and Alphabet Inc rose in early trading, supporting the tech-heavy Nasdaq index .

With the quarterly reporting season in full swing, market participants started to question whether companies including Apple Inc , Facebook and Tesla Inc could justify their premium valuations.

"Investors are digesting earnings that came out overnight and this morning, and taking a look at the fundamentals of what's going on in specific companies, as well as any outlook that can be provided to try to justify valuations," said Brian Vendig, managing executive at MJP Wealth Advisors in Westport, Connecticut.

Apple reported holiday-quarter sales and profit that beat Wall Street expectations, however, shares of the iPhone maker fell 1.9%.

Facebook rose 2.3% after soundly beating quarterly revenue estimates, but it warned Apple's impending privacy changes could hurt revenue by interfering with ad targeting.

Tesla shed 4.7% after the electric-car maker reported disappointing fourth-quarter results and failed to provide a clear target for 2021 vehicle deliveries.

Data showed the U.S. economy contracted at its sharpest pace since World War Two in 2020 as COVID-19 ravaged services businesses such as restaurants and airlines.

A separate report showed 847,000 more people likely filed jobless claims last week, strengthening views of a persistent labor market weakness.

"This is a market which thinks about what the economy might look like six months from now ... and I think this is a time when the near-term numbers are of very little consequence to most investors," said Rick Meckler, partner at Cherry Lane Investments, a family investment office in New Vernon, New Jersey.

Concerns about slowing momentum in economic recovery due to rising coronavirus cases, heightened stock market valuations, and uneven distribution of vaccine rollouts have kept investors on edge about a pullback and increase in volatility in the near-term.

American Airlines Group Inc surged 26.1%, becoming the latest stock to lead bumper gains for a series of social-media hyped stocks, broadening a battle between small-time traders and major Wall Street institutions that has shaken U.S. and European stock markets.

At 9:52 a.m. ET the Dow Jones Industrial Average was up 334.78 points, or 1.10%, at 30,637.95, the S&P 500 was up 39.24 points, or 1.05%, at 3,790.01, and the Nasdaq Composite

was up 93.42 points, or 0.70%, at 13,364.01.

Comcast Corp added 3.5% after it reported better-than-expected fourth-quarter revenue, as broadband demand continued to offset pandemic-related weakness in its theme park and filmed entertainment businesses.

Advancing issues outnumbered decliners for a 3.61-to-1 ratio on the NYSE and a 2.39-to-1 ratio on the Nasdaq.

The S&P index recorded eight new 52-week highs and no new low, while the Nasdaq recorded 47 new highs and three new lows.

(Reporting by Devik Jain and Shreyashi Sanyal in Bengaluru; Editing by Shounak Dasgupta)

((Devik.Jain@thomsonreuters.com; within U.S. +1 646 223 8780; outside U.S. +91 80 6182 2062))