The day's headlines helped brighten the economic picture, with retailers reporting their best monthly sales in two years as consumers spent freely despite the recent spike in gasoline prices. Wall Street also welcomed upbeat earnings from Tyco International Ltd.

While the Labor Department said U.S. worker productivity rebounded in the first quarter, a sharp rise in wage costs stoked concerns about inflation as the market continued speculating the potential for more interest rate hikes from the Federal Reserve.

But William Hummer, chief economist for Wayne Hummer Investments, said he was not surprised by the higher labor costs given the pace of economic growth, and noted that the annualized wage inflation rate of 1.4 percent was relatively tame.

"The economy is resilient, more than most thought, and I think that could very well continue into the second half," Hummer said. "Headwinds of interest rates and energy costs will diminish the momentum somewhat, but not in a major way."

According to preliminary calculations, the Dow Jones industrial average gained 38.58, or 0.34 percent, to 11,438.86, its best close since reaching 11,489.59 on Jan. 19, 2000.

Broader stock indicators advanced. The Standard & Poor's 500 index rose 4.40, or 0.34 percent, to 1,312.25, and the Nasdaq composite index surged 19.93, or 0.87 percent, to 2,323.90.

Bonds recovered earlier losses and stayed flat, with the yield on the 10-year Treasury note unchanged at 5.15 percent from late yesterday. The stabilizing bond market eased investors' inflation and interest rate jitters and helped the major indexes close in on multiyear highs, said Steven Goldman, chief market strategist for Weeden & Co.

"We still have a great deal of momentum," Goldman said. "Stocks should continue to edge higher with modest setbacks along the way."

Traders sold off crude futures for a third straight day after government data yesterday showed a rebound in gasoline supplies ahead of the summer driving season. A barrel of light crude lost $2.34 to settle at $69.94 on the New York Mercantile Exchange, where gasoline sank 9.1 cents to $1.995 a gallon.

Elsewhere, the dollar was little changed against the Japanese yen, while gold prices surpassed $680 an ounce.

The Labor Department said worker productivity grew 3.2 percent for the first three months of the year, beating economists' estimates of 2.8 percent and reversing a fourth-quarter decline of 0.3 percent. However, quarterly wage costs rose 2.5 percent, down from 3 percent in the fourth quarter but more than twice the consensus target of 1.2 percent.

Wall Street also digested an unexpected rise in weekly unemployment claims, although the job market appeared to be in good shape. The department said first-time jobless claims added 7,000 to reach 322,000 last week, above estimates of 310,000.

Strong April sales reports gave retail stocks a boost. Wal-Mart Stores Inc. confirmed its sales grew a better-than-expected 6.8 percent last month, but shares slid 29 cents to $46.40. Gap Inc.'s monthly sales slid 3 percent but topped estimates for a 4.7 percent drop; Gap added 13 cents to $18.16.

Tyco said its profit grew fivefold last quarter, but the manufacturing conglomerate cut its full-year outlook. Tyco nonetheless rose 98 cents to $27.92.

Eastman Kodak Co. posted its sixth straight quarterly loss and said it is considering the sale of its health-imaging business. Kodak sank 59 cents to $26.76.

Starbucks Corp. advanced $1.44 to $38.79 after the coffee chain said profit swelled 27 percent last quarter and topped estimates by 2 cents per share.

Advancing issues led decliners by 5 to 3 on the New York Stock Exchange, where volume of 1.75 billion shares matched the 1.75 billion shares changing hands at the same point yesterday.

The Russell 2000 index of smaller companies rose 6.99, or 0.91 percent, to 774.72.