Stocks jumped on Thursday after Wells Fargo said it expects to report a record quarterly profit, fueling a month-long rally prompted by hopes that deterioration in the financial sector was abating.

Wells Fargo shares shot up 31.7 percent to $19.61 after the bank saw strength in its mortgage banking business as refinancings hit a six-year high. That helped the bank forecast a profit of $3 billion for the first quarter, topping analysts' expectations.

The state of the banks has been a key factor behind the stock market's sentiment and is at the heart of the global economic crisis. The current rally to two-month highs first took off in early March when several major banks said they had made money at the beginning of the year.

This is another step in that (banks) are about to report earnings that are not a disaster and are creeping into the black, said Bruce Zaro, chief technical strategist at Delta Global Advisors in Boston.

It's another piece of gathering evidence that banks can very likely weather and probably pass the worst operating results that they've seen.

In the latest sign that the mood of consumers is on the mend, many U.S. retailers posted smaller-than-expected sales declines for last month, signaling shoppers may be loosening their grip on their wallets.

The Dow Jones industrial average <.DJI> rose 246.27 points, or 3.14 percent, to 8,083.38. The Standard & Poor's 500 Index <.SPX> gained 31.40 points, or 3.81 percent, to 856.56. The Nasdaq Composite Index <.IXIC> climbed 61.88 points, or 3.89 percent, to 1,652.54.

The broad S&P 500 racked up its fifth consecutive weekly advance and is up more than 26 percent since the 12-year closing low reached on March 9.

In another sign of changing market sentiment, the CBOE Volatility Index <.VIX>, also known as Wall Street's fear gauge, closed at its lowest level since September 2008.

Investors also dumped defensive stocks in the consumer and health-care areas in favor of companies more tied to the economic cycle. Among losers, Merck was down 1.7 percent at $26.30, while on the flip side, Caterpillar gained 10 percent to $32.52.

Shares of JP Morgan Chase surged 19.4 percent to $32.75, making it the Dow's top performer. The KBW Bank index <.BKX> jumped 20.1 percent and was up for the fifth straight week, its longest weekly winning streak since the fall of 2006. It was the best gain for the bank index since at least 1993.

However, analysts cautioned that the news from Wells Fargo was not an all-clear signal for the sector.

It is still going to remain a bank-to-bank issue, said Fred Dickson, market strategist and director of retail research at D.A. Davidson & Co in Lake Oswego, Oregon.

I don't think one can generalize and make a blanket statement that all the bank results are going to be slightly better than what is currently expected.

President Barack Obama plans to meet with top financial regulators on Friday to discuss the next steps with the stress tests being conducted on major U.S. banks, a source said.

On the economic front, data showed the number of workers filing new claims for unemployment benefits fell last week, but the number was still at a level signaling the job market had yet to bottom.

Some recent better-than-expected data in the retail and housing sectors also helped drive the market higher as investors bet on signs of stabilization.

Among retailers, department store chain Macy's Inc was up 15.1 percent at $11.88. The S&P retail index <.RLX> gained 4.6 percent.

Berkshire Hathaway rose after the profit projection from Wells Fargo, one of the bank's largest investments. The gains came the day after Berkshire lost its triple-A credit rating. Berkshire's Class A shares rose 3.9 percent to $92,400.

Apple Inc led the Nasdaq higher, rising 2.8 percent to $119.57 after Credit Suisse lifted its price target on the stock to $133 from $120.

(Additional reporting by Edward Krudy; Editing by Jan Paschal)