Stocks steadied on Thursday as the European Central Bank's purchase of Italian bonds helped calm markets queasy over the euro zone debt crisis.

An Italian debt auction also went better than expected and signs of new governments in Italy and Greece eased fears of a euro zone break-up, sending stocks up sharply early but gains quickly eased.

The ECB aggressively bought short-term bonds, helping sentiment on Italy, which has replaced Greece as the biggest source of concern in Europe's two-year-old debt crisis. But worries persisted that Italy's borrowing costs were unsustainable.

We are seeing some easing of the Italian bond rates and some confidence in the new Greek leadership but this has been a seesaw battle from the start. We get a piece of good news today, and then we get something else tomorrow, said Rick Meckler, president of investment firm LibertyView Capital Management in New York.

Europe is definitely putting a cap on our rally here.

The Dow Jones industrial average <.DJI> rose 66.98 points, or 0.57 percent, at 11,847.92. The Standard & Poor's 500 Index <.SPX> was up 4.74 points, or 0.39 percent, at 1,233.84. The Nasdaq Composite Index <.IXIC> was down 2.13 points, or 0.08 percent, at 2,619.52.

The S&P 500 saw its worst daily percentage drop since August 18 on Wednesday.

Economic data showed new U.S. jobless claims declined for the second straight week to the lowest level since April, while the trade deficit unexpectedly shrank in September to its narrowest level since December.

Cisco Systems Inc jumped 6 percent to $18.66 after the world's biggest networking equipment maker reported earnings that beat estimates and forecast revenue and profit above expectations.

But pressuring the Nasdaq, Green Mountain Coffee Roasters Inc slid 37 percent to near $42.20 after quarterly revenues came in less than expected, raising fears about the company's growth potential.

Apple shares were down 2.5 percent at $385.22.

Italy paid its highest yield in 14 years to sell 12-month debt in an auction, and while there was relief the sale went smoothly, worries festered that Italy's borrowing costs were unsustainable.

In Greece, former European Central Bank vice president Lucas Papademos was appointed to head the country's new crisis coalition.

(Reporting by Angela Moon; editing by Jeffrey Benkoe)