Stocks rallied on Thursday as investor worry was eased after China refuted a report that it was reviewing its euro-zone bond holdings due to the region's debt crisis.

Thursday's gains marked the largest advance for the S&P 500 on a percentage basis since May 10, although volume was below average.

China's denial was enough of a catalyst to entice buyers into the volatile equity market, which fell sharply from April highs as investors worried that Europe's debt woes would spiral into a larger financial crisis.

As you look through it, Europe is not getting worse, said Tim Holland, co-portfolio manager of the Aston/TAMRO Diversified Equity Fund in Alexandria, Virginia. Trees don't grow to the sky, but did the market deserve to be off 15 percent in three weeks?

The People's Bank of China said a Financial Times report that Beijing was concerned about its euro-zone exposure was groundless. The report had short-circuited a rally in the previous session.

Microsoft Corp climbed 4 percent to $26, a day after ceding its position to Apple as the largest technology company by market cap. FBR Capital Markets upgraded the Dow component to outperform, citing Microsoft's improving fundamentals and recent share underperformance.

The Dow Jones industrial average <.DJI> gained 284.54 points, or 2.85 percent, to 10,258.99. The Standard & Poor's 500 Index <.SPX> advanced 35.11 points, or 3.29 percent, to 1,103.06. The Nasdaq Composite Index <.IXIC> jumped 81.80 points, or 3.73 percent, to 2,277.68.

Technology stocks also rebounded after having been battered recently as a result of their higher concentration of overseas sales. The PHLX Semiconductor index <.SOXX> jumped 5.2 percent.

You get a macro stimulus and you look for those areas that have pulled back hard and can give you some quick returns. And that's what you're seeing today, said Williams Financial Group analyst Cody Acree, about Thursday's chip rally.

The S&P 500 closed above the 1,090 level it has failed to breach in the last week, which is seen as technical resistance.

Also being eyed by analysts as a significant indicator would be a close above the 200-day moving average, which now stand right above the 1,104 mark.

The CBOE Volatility Index <.VIX>, or VIX, known as Wall Street's fear gauge, fell 15.3 percent to 29.68, continuing its pattern of large swings since the S&P hit its April high.

There is a debate in the markets going on right now whether we are experiencing this sort of correction in a longer term bull market in equities or are we having a sea change in business prospects around the world -- the volatility demonstrates that debate, said Michael Cuggino, portfolio manager at Permanent Portfolio Funds in San Francisco.

Data showing the U.S. economy grew at a slower pace than expected in the first quarter was not enough to keep investors from grabbing bargains after major indexes dropped more than 10 percent over the past month.

In other data released on Thursday, new applications for state jobless benefits dropped to 460,000 last week from 474,000 in the previous week, the Labor Department said, pointing to a gradual labor market recovery.

Dow component Pfizer Inc rose 1.7 percent to $15.37 after the drugmaker said it would stop recruiting patients for a clinical trial for its heart drug Inspra because the study reached its main efficacy goal early.

In earnings news, both Costco Wholesale Corp and Tiffany & Co reported quarterly profits that beat expectations. Tiffany also raised its outlook. Costco advanced 4.9 percent to $58.74. Tiffany shot up 7.5 percent to $46.86.

A late flurry of activity pushed volume up to 9.88 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, slightly above last year's estimated daily average of 9.65 billion.

Advancing stocks handily outnumbered declining ones on the New York Stock Exchange by a ratio of about 13 to 1, while on the Nasdaq, about seven stocks rose for every one that fell.

(Reporting by Chuck Mikolajczak; Additional reporting by Alexei Oreskovic; Editing by Jan Paschal)

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