Stocks rallied on Thursday as oil prices slipped and better-than-expected economic data raised expectations of a strong employment report on Friday.

With oil prices pausing from their recent climb, investors focused on the U.S. economy, which has shown steady improvement in reports this week. Many believe the Labor Department's report could be a turning point for the recovery.

The expectations are high, said Bill Strazzullo, partner and chief investment strategist at Bell Curve Trading in Boston. I don't think anybody wants to be short going into tomorrow's payrolls number.

The whisper number among traders is that non-farm payrolls will rise by over 200,000, compared to a median estimate of 185,000 by economists polled by Reuters.

Industrial stocks led the market higher, boosted by a weaker dollar and an improving outlook for global demand. The S&P industrial index <.GSPI> gained 2.4 percent, with Caterpillar Inc up 3.1 percent to $104.11.

The Dow Jones industrial average <.DJI> gained 181.41 points, or 1.50 percent, to 12,248.21. The Standard & Poor's 500 Index <.SPX> rose 20.24 points, or 1.55 percent, to 1,328.68. The Nasdaq Composite Index <.IXIC> added 50.93 points, or 1.85 percent, to 2,799.00.

Stocks have shown resilience in the face of economic headwinds. The broad S&P 500 is down only about 1 percent from a peak in late February after falling around 3 percent due to growing violence in oil-producer Libya.

It is showing you that there is enough cash on the sidelines that has missed the boat and wants in, said Scott Marcouiller, chief technical market strategist at Wells Fargo Advisors in St. Louis.

However, volume continues to be below average on days when the market rallies, leading some to question the conviction behind upward moves.

We're up a ton, but the feeling is apathetic, said Ken Polcari, managing director at ICAP Equities, a New York Stock Exchange floor broker.

The Arab League said a peace plan for Libya was under consideration. The plan put forth by Venezuelan President Hugo Chavez, if successful, could end a major headwind for equities.

April U.S. crude futures fell 1.7 percent to $100.45 per barrel while Brent crude fell 2.3 percent to $114.04.

Initial jobless claims fell last week to 368,000 -- a 2-1/2 year low -- one day after a robust report on private-sector hiring.

In other economic news, the Institute for Supply Management's non-manufacturing index rose to 59.7 in February, slightly above forecasts and higher than the January result.

Several top U.S. retailers posted bigger-than-expected sales gains for February. The S&P retail index <.RLX> rose 0.7 percent.

Retailers Saks Inc and Nordstrom Inc beat

forecasts, helped by Valentine's Day sales. Saks shares rose 6.1 percent to $12.44, while Nordstrom gained 1.7 percent to $44.97.

Close-out retailer Big Lots Inc shares rose 3.4 percent to $41.25 after it forecast strong 2011 profits.

H.J. Heinz Co rose 0.4 percent to $49.17 after quarterly income topped expectations and news of a deal to buy an 80 percent stake in a Brazilian food maker.

(Editing by Kenneth Barry)