Stocks closed mostly higher on expectations that the Federal Reserve will cut interest rates and the U.S. government will help homeowners recover from the subprime mortgage crisis.
The technology-laced Nasdaq fell after a disappointing outlook from Dell but mortgage lenders, bond insurers and homebuilding stocks that have been battered by the fallout over subprime lending posted double-digit gains.
Investors turned away from the perceived safe-haven of Treasurys, pushing down bond prices, after Federal Reserve Chairman Ben Bernanke bolstered rate cut hopes.
For the week, the Dow climbed 3 percent, the S&P 500 gained 2.8 percent and the Nasdaq gained 2.5 percent.
"It feels like a better week than we've had for a while," said Steve Sachs, director of trading at Rockville, Md.-based Rydex Investments. "It's all rate-cut based. Fundamentals haven't changed -- I see fundamentals weakening rather than strengthening, but in the near term we're going to a little more upside."
But even with the weekly advance, both the Dow and the S&P 500, marked their worst monthly drop in five years. For the month of November, stocks lost ground: The Dow slid 4 percent, the S&P 500 fell 4.4 percent, and the Nasdaq sank 6.9 percent, its worst monthly drop since July 2004, when it slumped 7.8 percent.
Talk the U.S. Treasury Department was finalizing a plan with mortgage industry leaders that would hold interest payments steady for many subprime borrowers facing higher rates
and possible foreclosure buoyed stocks and cut into bonds.
Many teaser rate loans are now entering default, which gave investors who have been spooked by the crisis some relief.
"This is a little bit of the extension on the relief that if credit concerns can ease, then maybe we're out of the woods and a lot of the write-downs are probably over," said David Goerz, chief investment officer at HighMark Capital Management in San Francisco.
Tech stocks fell after a cautious outlook from Dell, which posted 27 percent profit growth but warned rising costs could depress future results.
European stocks advanced for a third day, with the pan-European FTSEurofirst 300 index rising 1.2 percent at 1,526.59 points. But it was the worse month since May 2006.
Earlier in Asia, Tokyo's Nikkei average touched a three-week high while the MSCI's measure of other Asian stocks climbed to two-week highs. Emerging market equities gained almost 1 percent.
Bernanke helped spur the positive sentiment, signaling in a speech on Thursday an openness to lower interest rates again.
A recent resurgence in financial strains had dimmed the outlook for the U.S. economy, Bernanke said, adding that "the Fed will have to remain exceptionally alert and flexible."
Despite persistent concerns over how deeply subprime mortgage writedowns will affect the sector, JP Morgan Chase and Countrywide Financial set the pace for a huge day for financials.
"The wave of hysteria that hit these stocks over the last couple of months was well overdone," said Richard Bove, financial strategist at Punk Ziegel. "We are not in a financial crisis."
In tandem, home builder stocks regained some of the ground they lost Thursday amid a continuing slew of bad news for the real estate market. Shares were up sharply at D.R. Horton , Pulte, Centex and Lennar.
Rallying stocks tempted investors out of safer assets, pushing bond prices lower.
The dollar rallied against a basket of six major currencies, gaining 0.73 percent to 76.142. On the week, it was up 1.2 percent, on track for its best weekly gain since at least September 2006.
Lower U.S. interest rates usually weigh on the dollar because they reduce the yield on dollar-denominated assets, but analysts said the market was now taking a longer view.
"It's the perception that the Fed will do what it has to do to keep the U.S. from falling into recession," said David Watt, senior currency strategist at RBC Capital Markets in Toronto.
Oil plunged, extending a fall that has lopped nearly 10 percent off record prices on concerns about the health of the U.S. economy, which would reduce energy consumption.
"We're in a downtrend because the market is very concerned about the economy and where it goes from here," said Eric Wittenauer, analyst at AG Edwards in St. Louis.
Oil also tumbled on expectations that the Organization of the Petroleum Exporting Countries could agree in Abu Dhabi next week to boost output.
Shares surged at both Sirius Satellite Radio and XM Satellite Radio after a Bear Stearns analyst said he expected a court rulingon a possible merger between the two companies.