Investors betting on a big gain in U.S. payrolls pushed Wall Street to its best one-day rally in three months on Thursday, but weak volume lingers as a concern for those hoping for another leg higher.

As oil paused from its recent climb, the market's focus shifted to stronger-than-expected economic data a day before the February U.S. employment report.

The median estimate is for a gain of 185,000 jobs, according to economists polled by Reuters, but market sentiment was leaning toward a number above 200,000, traders said.

There are still concerns about high oil prices but the bottom line is, the U.S. economy is improving. We continue to get confirmations of that, and it's a good sentiment heading into Friday's numbers, said Ryan Detrick, technical analyst at Schaeffer's Investment Research in Cincinnati, Ohio.

The Dow Jones industrial average <.DJI> was up 191.40 points, or 1.59 percent, at 12,258.20. The Standard & Poor's 500 Index <.SPX> was up 22.53 points, or 1.72 percent, at 1,330.97. The Nasdaq Composite Index <.IXIC> was up 50.67 points, or 1.84 percent, at 2,798.74.

The Dow and S&P 500 posted their biggest one-day gains since December 1.

However, volume continued to be below average on days when the market rallies, causing some traders to be skeptical about the durability of the rally. About 7.99 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, below last year's daily average of 8.47 billion.

The put-to-call ratio in the options market also didn't change much despite the day's rally as traders continued to hedge against a potential drop in the market.

As much as investors are excited about a pullback so that they can jump in, they are just as concerned about how quickly this market can turn, Detrick said.

Initial jobless claims fell last week to 368,000 -- a 2-1/2 year low -- one day after a robust report on private-sector hiring.

The Institute for Supply Management's non-manufacturing index rose to 59.7 in February, slightly above forecasts and higher than the January result.

Industrial stocks led the market higher, boosted by a weaker dollar and an improving outlook for global demand. The S&P industrial index <.GSPI> gained 2.4 percent, with Caterpillar Inc up 3.2 percent to $104.25.

Stocks have shown resilience in the face of economic headwinds. The broad S&P 500 is down only about 1 percent from a peak in late February after falling around 3 percent due to growing violence in oil-producer Libya.

The Arab League said a peace plan for Libya was under consideration. The plan put forth by Venezuelan President Hugo Chavez, if successful, could remove a major headwind for equities.

Oil prices retreated from near 2-1/2 year highs. Brent crude futures fell $1.56 to settle at $114.79 after Venezuela's proposed plan to end Libya's crisis set off profit-taking.

Several top U.S. retailers posted bigger-than-expected sales gains for February. The S&P retail index <.RLX> rose 1.2 percent.

About five stocks rose for every one that fell on the New York Stock Exchange. On the Nasdaq, advancing stocks beat declining ones by a ratio of 10 to 3.

(Reporting by Angela Moon, Editing by Kenneth Barry)

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