Analysts said investors also were heartened by strong sales from software maker SAP and a bullish outlook from Foundry Networks, giving a boost to tech shares.

"The news on balance is fairly good," said Hugh Johnson, chief investment officer at First Albany Corp. "There are small data points or factoids that seem to help the case for a bull market. Confidence is beginning to improve."

The Dow surged 180.87, or 2.1 percent, to close at 8,776.18, according to preliminary calculations.

The broader market also finished sharply higher. The Nasdaq composite index climbed 37.40, or 2.7 percent, to 1,438.47. The Standard & Poor's 500 index gained 17.65, or 1.9 percent, to 927.58.

The advance continued a pattern of choppy trading, with big gains followed by big drops, that has marked the new year on Wall Street. Investors have collected profits on uncertainty about the economy or corporate earnings, only to turn around and again start buying with gusto when they hear better news.

Today, the Labor Department reported new claims for unemployment benefits fell by a seasonally adjusted 19,000 to 389,000, the lowest level since Dec. 21, offering hope that layoffs might be stabilizing.

"The biggest driver today is the jobless claims number," said Robert Froehlich, chief investment strategist for Deutsche Asset Management in Chicago. "The 400,000 mark is such a threshold number to traders, there's a psychological impact when it falls below that."

SAP rose $1.66 to $24.15 after Europe's largest software maker reported strong fourth-quarter license sales that beat market expectations.

Foundry Networks climbed $1.28, or 15.7 percent, to $9.43 after the computer networking equipment maker said it expects fourth-quarter earnings to meet analysts' expectations.

Wal-Mart gained $1.93 to $51.92 after the world's largest retailer said it had an increase of 2.3 percent in December same-store sales, matching its revised forecast for the holiday season.

Analysts believe investors are largely upbeat about the market prospects, particularly after President Bush proposed to cut taxes by $674 billion over 10 years, including a plan to eliminate the federal tax investors pay on stock dividends.

Advancing issues outnumbered decliners 5 to 2 on the New York Stock Exchange. Volume was moderate.

The Russell 2000 index, a barometer of smaller company stocks, rose 6.87, or 1.8 percent, to 395.94.