Stocks rose on Thursday on stronger-than-expected economic data and German lawmakers' approval of new powers for the euro zone's crisis fund.

The data showed modest improvement in the jobs market, second-quarter economic growth and housing, although the stubbornly high U.S. unemployment rate presents a major hurdle for economic progress.

The U.S. Labor Department said initial applications for unemployment benefits fell to a five-month low last week.

It doesn't change the bigger outlook on jobs and the fact we are stuck with this higher unemployment rate than anybody is comfortable with, but it is on the positive side, said Wayne Schmidt, chief investment officer at Gradient Investments In St. Paul, Minnesota.

The Dow Jones industrial average gained 202.95 points, or 1.84 percent, to 11,213.85. The Standard & Poor's 500 Index rose 15.71 points, or 1.36 percent, to 1,166.77. The Nasdaq Composite Index added 15.85 points, or 0.64 percent, to 2,507.43.

In addition, the Commerce Department said gross domestic product grew at annual rate of 1.3 percent in the April-June quarter, up from the previously estimated 1.0 percent pace and helped by consumer spending and export growth.

The National Association of Realtors Pending Home Sales Index, based on contracts signed in August, was down 1.2 percent to 88.6, its lowest since April. Economists polled by Reuters ahead of the report were expecting sales to decline 1.8 percent.

Europe again averted disaster in its debt crisis when German deputies rallied behind Chancellor Angela Merkel to approve a stronger euro zone bailout fund on Thursday.

The Bundestag approved new powers for the 440 billion euro EFSF fund to make precautionary loans, help recapitalize banks and buy distressed countries' bonds in the secondary market.

Market volatility is likely to remain high as traders react to European headlines and attempt to gauge the commitment of governments and institutions as they work to prevent a Greek default.

We are just in an extremely volatile period here right now. The news today out of Germany is good and who knows, a day next week it may not be so good. We seem to be in this environment when 2 percent swings in the market are not uncommon any more -- it's a sign of the times where we are with the higher volatility and the large swings, said Schmidt.

Also supporting equities were statements from Federal Reserve Chairman Ben Bernanke on Wednesday that the central bank might need to ease monetary policy further if inflation or inflation expectations fall significantly.

The benchmark 500 index is expected to finish the year down for the first time in three years as an escalating European debt crisis and stalled U.S. economy lead strategists to slash forecasts in the latest Reuters poll.

Bank shares rose, with Citigroup Inc 4.3 percent to $27.04 and JPMorgan Chase & Co up 4.5 percent to $31.83. The KBW Bank index advanced 3.3 percent.

(Reporting by Chuck Mikolajczak; editing by Kenneth Barry)

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