Investors saw a slowdown in April employment growth as the latest sign of a softening economy, a reason for the Fed to stop raising interest rates. That countered worries over rising wages, which followed an upswing in employers' labor costs on Thursday.

Jack Caffrey, equities strategist for JPMorgan Private Bank, said the market appeared to be focusing on recent positive data instead of considering the long-term consequences of why the Fed would stop boosting rates - because economic growth has slowed enough to contain inflation.

"People are taking the weaker job creation, the stability in the unemployment rate and the uptick in jobless claims and spinning that into a hope the Fed will move to the sideline sooner than later," Caffrey said. "It's almost a hope-for-relief rally instead of a 'the Fed is done, things are slowing down' mentality."

Falling oil prices also helped stocks to their gains, although some believe higher gasoline prices will pressure consumer spending and keep the economy from overheating.

According to preliminary calculations, the Dow rose 138.88, or 1.21 percent, to 11,577.74, its best showing since the Dow reached its all-time high of 11,722.98 on Jan. 14, 2000. The Dow is now just 145.54 away from setting a new record.

Broader stock indicators were higher. The Standard & Poor's 500 index gained 13.51, or 1.03 percent, to 1,325.76, its highest level since Feb. 15, 2001; the Nasdaq composite index advanced 18.67, or 0.8 percent, to 2,342.57. The S&P remains 13.2 percent away from its all-time high, while the Nasdaq is 53.6 percent lower than its 2000 record.

The light trading volume was indicative of the market's ongoing uncertainty about interest rates and whether stocks can press past multiyear highs, said Christopher Piros, director of investment research for Prudential's Strategic Investment Research Group. Meanwhile, the jobs data left the inflation riddle unanswered, he said.

"We are at a point where inflation expectations are still rising, and the Fed is faced with a dilemma of whether they've done enough to cap inflation, but not enough to roll over the economy," Piros said. "I haven't seen real signs of a pickup in core inflation, although it's been ticking up slowly."

Evidence of a tapering economy in this week's data fed investors' optimism that the Fed will soon halt its rate increases, giving the major indexes a strong boost. For the week, the Dow was up 1.85 percent, the S&P climbed 1.16 percent and the Nasdaq rose 0.86 percent.

The Labor Department said U.S. employers added 138,000 jobs in April, far less than estimates of a 200,000 gain. Average hourly earnings meanwhile jumped 0.5 percent, above the consensus target of 0.3 percent. The unemployment rate held steady at 4.7 percent.

Bonds recouped recent losses, with the yield on the 10-year Treasury note falling to 5.11 percent from 5.15 percent late Thursday. The U.S. dollar sank against the Japanese yen and was flat against European currencies, while gold prices topped $680 per ounce.

Crude futures edged up following a three-day decline spurred by government data showing improving supplies of gasoline and flat motor fuel demand. A barrel of light crude added 25 cents to settle at $70.19 on the New York Mercantile Exchange.

Warner Music Group Corp. reported a loss for the latest quarter amid declining revenue from its music publishing business. However, record music sales rose 9 percent, led by a threefold jump in digital sales. Warner Music's stock rose 66 cents to $29.40.

Medco Health Solutions Inc. posted a 66 percent slide in first-quarter profit, hurt by a $100 million charge to settle three legal matters. Medco nonetheless rose $1.99 to $52.76.

Luxury homebuilder Toll Brothers Inc. rose $1.21 to $30.85 although its signed contracts tumbled 29 percent last quarter. The company also lowered its forecast for full-year home deliveries.

The Russell 2000 index of smaller companies gained 7.11, or 0.92 percent, to 781.83. The index rose above 700 points for the first time in early January and has continued pushing to new all-time highs in 2006.

Japan's markets were closed Friday for a national holiday. Britain's FTSE 100 rose 0.91 percent, Germany's DAX index surged 1.22 percent and France's CAC-40 was higher by 1.01 percent.