According to the Commerce Department, fourth-quarter GDP grew at an annual rate of 3.8 percent, less than the 4 percent economists forecast. The department's price index rose 2.9 percent for the quarter, more than Wall Street expected, but was offset by increases in consumer spending and capital expenditures by businesses.

Along with an upbeat report on the nation's oil reserves, the GDP report prompted Wall Street's strongest day of 2005 on heavy volume. All three major indexes saw their biggest one-day point gains since Dec. 1.

"Normally you wouldn't see this GDP report as a good thing, but with inflation out there, a little bit less growth is viewed as a positive," said Larry Peruzzi, senior equity trader at The Boston Company Asset Management. "It cools things down just enough, without getting too cold."

The Dow rose 135.23, or 1.3 percent, to 10,540.93.

Broader stock indicators also gained ground. The Standard & Poor's 500 index was up 16.05, or 1.38 percent, at 1,181.41. The Nasdaq composite index gained 31.79, or 1.61 percent, to 2,005.67, after falling to a five-month low yesterday. The Nasdaq closed above the psychologically important 2,000 mark for the first time since March 21.

The drop in oil prices came after the Energy Department reported a 5.4 billion barrel increase to the nation's crude oil reserves. Light, sweet crude futures were down 24 cents at $53.99 per barrel on the New York Mercantile Exchange, though oil prices had fallen as low as $52.50 per barrel earlier in the session.

The dollar fell against most major currencies, while gold prices rose. The bond market built on yesterday's strong gains, with the yield on the 10-year Treasury note slipping to 4.55 percent, from 4.58 percent late yesterday.

Investors were also looking ahead to a pair of economic reports Friday — the Labor Department's March employment figures and the Institute for Supply Management's monthly report on the industrial sector. Economic data, particularly employment data, has been closely watched as the Federal Reserve plots its rate-tightening policy, and Wall Street is eager to know whether the next hike will be a 0.25 percentage point move like all the others, or a more aggressive half-point rise.

"It's hard to see a sustainable advance with the precarious nature of interest rates here and how they're moving higher. Who's to say when that stops?" asked Steven Goldman, chief market strategist with Weeden & Co. in Greenwich, Conn. "Until we get a handle on what's going on with rates it's difficult to know what's next, and that puts a bit of a lid on stocks."

Qwest Communications International Inc. lost 2 cents to $3.77 after a Goldman Sachs analyst said the company would likely continue to pursue a merger with MCI Inc., which agreed to a $7.6 billion takeover by Dow industrial Verizon Communications Inc. MCI rose 35 cents to $24.13, while Verizon advanced 57 cents to $35.43.

Morgan Stanley climbed $1.67 to $55.28 after the company said three more executives would leave the brokerage house following a management shakeup. Dissident shareholders and former executives have increased calls for Chief Executive Philip Purcell to resign, saying the departure of other executives won't be enough to right the company.

Shares of The Walt Disney Co. rose 45 cents to $28.35 a day after the company officially parted ways with Miramax chiefs Bob and Harvey Weinstein. Disney will retain the Miramax name and film library, and the Weinstein brothers will take the Dimension label and its catalog as the core of a new venture-funded studio.

American International Group Inc. lost $1.04 to $57.16 after the company said it will delay filing its annual report. The embattled insurer said it discovered improper documentation for a controversial transaction with a Berkshire Hathaway Inc. unit at the center of state and federal investigations.

French telecommunications equipment maker Alcatel rose 5 cents to $12.30 after reiterating its full-year earnings outlook, which called for double-digit earnings per share for 2005 and a single-digit rise in sales.

Advancing issues outnumbered decliners by more than 2 to 1 on the New York Stock Exchange, where preliminary consolidated volume came to 2.11 billion shares, compared with 2.22 billion traded yesterday.

The Russell 2000 index of smaller companies was up 10.27, or 1.7 percent, at 614.90.

Overseas, Japan's Nikkei stock average fell 0.29 percent. In Europe, France's CAC-40 dropped 0.42 percent, Britain's FTSE 100 shed 0.37 percent and Germany's DAX index lost 0.10 percent.