The S&P 500 and the Nasdaq edged up on Thursday, hovering around two- and three-year highs respectively, but a recent rise in bond yields and uncertainty over tax-cut legislation unsettled investors.

A sharp selloff in U.S. government bonds earlier this week pushed the yield on the 10-year Treasury note above 3 percent. Although yields have stabilized, the rise unnerved investors.

The rise in market rates could hinder the Federal Reserve's efforts to keep rates low and stimulate the economy by buying Treasuries.

The key issue is the government's goal of purchasing its debt and creating an environment of artificially low rates in order to stimulate markets, said Maier Tarlow, a floor trader at NYSE with Raven Securities. Cheap money acts as a carry-trade to the equity markets.

Stocks got a slight lift after Treasury prices rose following a well-bid 30-year bond auction but continued to trade choppily and in a narrow range.

The Nasdaq and the S&P edged higher, but the Dow was pressured by major manufacturer DuPont after it gave a lackluster outlook for 2011. Blue-chip Exxon Mobil also slipped, pressured by the stronger dollar.

A tentative agreement with congressional Republicans to extend tax breaks announced by President Barack Obama this week has hit opposition from some prominent Democrats, also souring the mood in the market. Wall Street wants the tax breaks to boost returns and spur growth.

The Dow Jones industrial average <.DJI> dipped 21.76 points, or 0.19 percent, to 11,350.72. The Standard & Poor's 500 Index <.SPX> gained 2.16 points, or 0.18 percent, to 1,230.44. The Nasdaq Composite Index <.IXIC> rose 5.42 points, or 0.21 percent, to 2,614.58.

Investors said they remained bullish for a year-end rally. The CBOE Volatility Index VIX <.VIX>, a barometer of Wall Street anxiety, fell more than 0.6 percent to 17.63. The VIX usually moves inversely to the benchmark S&P index.

The VIX closed under 18 for two straight days, which is considered to be the start of a sustained period below its long-term average of just above 20, MKM derivatives strategist Jim Strugger said.

Technical signs and a forecast from an international bank suggested a positive outlook for U.S. stocks.

The S&P 500 fluctuated around 1,228, a resistance level that represents the 61.8 percent Fibonacci retracement of the 2007-2009 bear market slide, a key technical indicator.

We look for a sustained move above 1230-35 to get the next leg higher in the post-2009 bull trend under way, Credit Suisse said in a report. The investment company raised its 2011 outlook on the benchmark index to 1,350 from 1,223.

The Labor Department data showed first-time claims for jobless benefits fell more than expected last week, and the report was viewed as positive after last week's disappointing payrolls figures.

DuPont slipped 1.9 percent to $47.97 after the company gave earnings guidance for next year. Analysts' expectations fell in the middle of the range.

Exxon Mobil was down 0.1 percent at $71.78.

Financial stocks outperformed other sectors with Bank of America up 3.5 percent at $12.42 and JPMorgan Chase gaining 1.3 percent to $40.79.

(Reporting by Edward Krudy; Editing by Kenneth Barry)