Industrials led the Dow higher on Friday following a strong quarter and outlook from Caterpillar, and the index looked set to notch its best month since December.

The blue-chip index is up 4 percent for the month, while the S&P has risen 2.7 percent and the Nasdaq is up 3.2 percent, also on track for its best month of the year, though it edged lower in April's final session on disappointing news from Microsoft Corp and Research in Motion .

Heavy machinery maker Caterpillar Inc climbed after reporting a fivefold increase in quarterly profit and raising its full-year forecast.

This is another sign of how manufacturing is leading the economy, said Eli Lustgarten, senior research analyst for the industrial machinery sector at Longbow Securities in St. Louis. We think Caterpillar is fairly valued, but you have to be impressed with what they delivered. No matter what, this will be a good year for them.

The stock was the top gainer on the Dow, advancing 2.5 percent to a new all-time high of $115.46 while the S&P industrial sector <.GSPI> was the index's top-performing sector, up 0.4 percent. Caterpillar is up more than 20 percent so far this year while the industrial sector is up 11 percent.

Microsoft slumped 4 percent to $25.62 and was the Dow's biggest loser a day after it reported a dip in quarterly Windows sales, mirroring a recent downturn in personal computers. U.S.-listed shares of RIM shed 14 percent to $48.75 after cutting its first-quarter forecasts.

The Dow Jones industrial average <.DJI> was up 61.65 points, or 0.48 percent, at 12,824.96. The Standard & Poor's 500 Index <.SPX> was up 1.82 points, or 0.13 percent, at 1,362.30. The Nasdaq Composite Index <.IXIC> was down 2.10 points, or 0.07 percent, at 2,870.43.

Robust corporate earnings, ample liquidity from the Federal Reserve and the prospect of ultra-low interest rates for the rest of the year have sparked bullishness, pushing the Nasdaq to a 10-year high and the S&P 500 up over 8 percent this year. Major indexes also broke out to new yearly highs during the week, though May is usually seen as a seasonally weak month.

May has been the fourth weakest month for the Dow, averaging a 0.2 percent gain since 1950, according to the Stock Trader's Almanac. It also normally marks the start of the worst six months of the year for the industrials and has given rise to the adage, sell in May and go away.

With earnings largely behind us and with the results both good and bad, I expect that we'll see a pullback in equity markets, largely led by an increase in the dollar, said Marshall Gause, chief executive officer at the Denver-based Geneva Fund Partners.

The dollar held near a three-year low against a basket of currencies and was on track for its biggest weekly fall since mid-January, with more losses possible on Friday due to end-of-the-month demand to sell dollars.

Merck & Co Inc reported higher-than-expected quarterly earnings, fueled by strong sales of drugs for diabetes, asthma and rheumatoid arthritis, while Chevron Corp reported a jump in earnings as oil prices surged.

Shares of Merck rose 0.3 percent to $35.89 while Chevron added 0.7 percent to $109.55. Both stocks are Dow components.

(Editing by James Dalgleish)