The Dow and S&P 500 gained on Thursday, breaking a three-day losing streak, as data on the job market and regional manufacturing revived hopes that the recession-hit economy is stabilizing.

After gaining as much as 40 percent from a 12-year closing low in early March, the S&P 500 has eased as investors reassessed the potential strength of an economic recovery. The day's data revived optimism, but analysts said real improvement is needed to sustain the rally.

Financials supported the stock market after being among the week's biggest drags. Discover Financial Services gained 4 percent to $9.27 after it reported a smaller-than-expected operating loss as bad loans grew less than anticipated.

Lincoln National rose 6.9 percent to $15.92 after an upgrade from Credit Suisse, and the KBW insurance index <.KIX> rose 1.8 percent. The S&P financial index <.GSPF> gained 2.5 percent.

Data showed the number of people staying on jobless benefits fell for the first time since January, while manufacturing in the U.S. Mid-Atlantic region contracted much less than expected in June.

The data supports the case of those looking for the bottom of the economy in this quarter, said Jim Awad, managing director at Zephyr Management in New York.

The Dow Jones industrial average <.DJI> rose 58.42 points, or 0.69 percent, to 8,555.60. The Standard & Poor's 500 Index <.SPX> gained 7.66 points, or 0.84 percent, to 918.37. The Nasdaq Composite Index <.IXIC> was off just 0.34 of a point, or 0.02 percent, at 1,807.72.

The Nasdaq ended little changed as some big-cap technology companies fell.

RIM SLIDES ON OUTLOOK

Research In Motion fell 5.2 percent to $72.54 after the bell after its quarterly profit rose, but the BlackBerry maker gave an outlook that may disappoint some investors.

The stock had ended Nasdaq's regular session at $76.55, down almost 1 percent.

Healthcare companies and other defensive names -- deemed better positioned to withstand a still uncertain economy -- also buoyed the market. Merck & Co Inc jumped 3.6 percent to $25.65.

People are hedging their bets by saying we're going to stay in, but stay in defensively to protect their gains, said Awad.

Friday marks the end of the two-day quadruple witching period, referring to the expiration and settlement of June stock and index futures and options, which may increase volatility. The CBOE Volatility Index <.VIX> was down 4.8 percent, but slightly above the psychologically important 30 level.

On the downside, Caterpillar Inc shed 2.1 percent to $34.08 after the heavy machinery maker said its retail sales of machines had fallen at a faster pace in May. The stock was the Dow's biggest drag.

Government data showed that while the amount of workers filing new claims for jobless benefits rose last week, the number of people collecting aid after the initial week marked its biggest decline since November 2001.

Though regional manufacturing contracted in June, it was far less severe than the previous month, adding to stabilization hopes.

After a nearly 4 percent pullback over the past three sessions, the broad S&P 500 is up 35.7 percent from its 12-year closing low on March 9.

Trading volume was fairly light on the New York Stock Exchange, with about 1.09 billion shares changing hands, well below last year's estimated daily average of 1.49 billion. On the Nasdaq, about 2.11 billion shares traded, below last year's daily average of 2.28 billion.

Advancing stocks outnumbered declining ones on the NYSE by 1,741 to 1,263 while on the Nasdaq, 1,403 stocks rose while 1,239 shares fell.

(Editing by Jan Paschal)

Manufacturing Credit Suisse