Stocks rebounded on Thursday, a day after the S&P 500 suffered its worst day since mid-August as Italian bond yields eased.

Traders said the European Central Bank increased its bond buying, but the ECB's hard-line chief economist told regional governments not to expect the bank to rescue them with unlimited funds.

A sale on Italian debt went smoothly, but worries persisted that Italy's borrowing costs were unsustainable. The pullback in yields helped support market sentiment.

Also boosting the market mood, 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.

This data that we have on the U.S. is good, but it is hard to deny the overall story is Europe. It's the fact that the yields came down a little bit, the fact the Italian debt auction went a little better than expected and the Greeks have finally come together on a prime minister. said Peter Jankovskis, co-chief investment officer at OakBrook Investments LLC in Lisle, Illinois.

That is all pretty positive.

The Dow Jones industrial average gained 117.92 points, or 1.00 percent, to 11,898.86. The Standard & Poor's 500 Index rose 13.43 points, or 1.09 percent, to 1,242.53. The Nasdaq Composite Index climbed 22.63 points, or 0.86 percent, to 2,644.28.

The S&P 500 saw its worst daily percentage drop since Aug. 18 on Wednesday. Unlike Wednesday, all 10 S&P sectors were higher in early trading.

Cisco Systems Inc jumped nearly 6 percent to $18.66 and helped boost the Nasdaq after the world's biggest networking equipment maker forecast revenue and earnings above expectations for its fiscal second quarter.

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

Italy, the region's third-largest economy, has replaced Greece at the center of the European debt crisis storm, with the country's borrowing costs at unsustainable levels and Europe unable to afford a bailout.

(Reporting by Chuck Mikolajczak; editing by Jeffrey Benkoe)