Technology shares led the Nasdaq higher on Friday thanks to solid results from chipmakers, but a disappointment from Caterpillar kept markets from full-fledged optimism.

Dow component Caterpillar Inc , the heavy equipment maker that is considered a gauge of economic activity, fell 5.5 percent to $105.48 after its profits missed estimates and it offered cautious commentary on the state of the economy.

We had a little bit of shortfall from Caterpillar, said Anthony Conroy, head trader at BNY ConvergEx, an affiliate of the Bank of New York.

Chipmakers paced the market's gainers, with big moves up from Sandisk and Advanced Micro Devices after both companies reported strong results on Wednesday evening. The PHLX Semiconductor index <.SOX> rose 2.3 percent, led by AMD, which was up 17 percent, and Sandisk, up 10.4 percent.

Microsoft Corp posted a greater-than-expected jump in fourth-quarter profit but sales of its flagship Windows software disappointed for the third straight quarter. The Dow component rose 1 percent to $27.35.

General Electric Co dipped 0.5 percent to $19.07, even as it reported a 21.6 percent jump in quarterly profit.

The Dow Jones industrial average <.DJI> was down 28.99 points, or 0.23 percent, at 12,695.42. The Standard & Poor's 500 Index <.SPX> was up 1.43 points, or 0.11 percent, at 1,345.23. The Nasdaq Composite Index <.IXIC> was up 22.02 points, or 0.78 percent, at 2,856.45.

Caterpillar's stock, the best performing Dow component in 2010, was the average's top drag on Friday.

The company, a maker of equipment used in mining and construction, has been a stalwart performer in recent years, but rising labor and materials costs hit earnings. It was exerting a 46-point drag on the Dow, meaning that the 30-stock average would be higher without its losses.

McDonald's Corp's income topped estimates, sending the stock up 3.2 percent to $89.33.

European's sovereign debt crisis has continued to shadow markets. At an emergency summit on Thursday, euro zone leaders promised a second bailout for Greece with an extra 109 billion euros ($157 billion) of government money, plus a contribution by private sector bondholders that could top 50 billion euros by mid-2014.

Worries that euro-zone debt contagion could hurt U.S. banks have pressured equities in recent weeks.

Verizon Communications Inc swung to a second-quarter profit that beat expectations and named a new chief executive officer. The stock dropped 2.8 percent to $36.50.

Equities have also been pressured by the wrangling over a deal to raise the U.S. debt ceiling. Negotiations between U.S. President Barack Obama and the top Republican in Congress were not close to producing an agreement, lawmakers said.

(Editing by Leslie Adler)