Stocks bounced back on Thursday from the previous session's steep losses as investors latched onto positive corporate and economic news, in the absence of a clear worsening in Europe's debt crisis.
Still, trading was volatile and volumes were thin as turmoil in Europe's bond markets kept alive fears that the crisis could still engulf Italy.
A brighter picture came from U.S. companies. Merck raised its dividend and Cisco reported strong earnings, reinforcing the view that corporate America is showing strength even as problems in Europe weigh on investors' minds.
Italy paid sharply higher rates for its one-year borrowing, but not as much as some had feared. French bond yields surged amid worries over the country's credit rating.
Standard & Poor's later blamed a technical error for the distribution of a message suggesting it had downgraded France's credit rating. S&P said that was not the case and began an investigation of the matter.
Our domestic market is solid and showing signs of improvement, but we're not strong enough to ignore what's going on in Europe, said Randy Frederick, director of trading and derivatives for Charles Schwab in Austin, Texas.
Until we see a viable plan to stabilize Europe, we're going to be hinging on an hourly basis on what's coming out of there. I don't see this going away any time soon.
The Dow Jones industrial average <.DJI> was up 112.92 points, or 0.96 percent, at 11,893.86. The Standard & Poor's 500 Index <.SPX> was up 10.60 points, or 0.86 percent, at 1,239.70. The Nasdaq Composite Index <.IXIC> was up 3.50 points, or 0.13 percent, at 2,625.15.
Merck & Co Inc
Cisco Systems Inc
The CBOE Volatility index <.VIX> fell 9.2 percent, giving back some of the gains it posted on Wednesday, its biggest day since mid-August. The VIX is up 9 percent so far this week.
U.S. crude oil gained 2.1 percent, helping to lift energy shares. The S&P energy group <.GSPE> rose 1.8 percent and led all sectors, while industrials <.GSPI> added 1.1 percent and materials <.GSPM> was up 0.9 percent.
Oil and gas producer Hess Corp
These are the names people are gravitating to, because if a recovery comes out of Europe, these industries will be in high demand, said Michael Matousek, senior trader at U.S. Global Investors Inc, which manages about $3 billion in San Antonio.
However there's still a lot of volatility, and if we drop back under 1,225 on the S&P we'll know there's not a lot of buying power out there.
After the market closed, Walt Disney Co
The S&P 500 fell 3.7 percent on Wednesday, its worst daily percentage drop since August 18. In October, the index recorded its best monthly performance in 20 years on optimism European leaders were taking control of the debt crisis.
Thursday's economic data showed new U.S. weekly jobless claims declined to the lowest level since April, while the trade deficit unexpectedly shrank in September to its narrowest level since December.
Green Mountain Coffee Roasters Inc
Italy paid its highest yield in 14 years to sell 12-month debt in an auction. Worries remained its borrowing costs were unsustainable.
In Greece, former European Central Bank vice president Lucas Papademos was appointed to head the country's new crisis coalition.
Volume was about 7.3 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below last year's daily average of 8.47 billion.
More than two stocks rose for every one that fell on the New York Stock Exchange, while on the Nasdaq, 60 percent of stocks closed higher.
(Reporting by Ryan Vlastelica; Editing by Kenneth Barry)