The Dow and the S&P 500 rose on Thursday following three days of losses as economic data pointing to stabilization in the job market and improving regional business conditions lifted investor sentiment.

Financial shares commanded gains, with Lincoln National up 7.1 percent at $15.96 following an upgrade from Credit Suisse and the KBW insurance index <.KIX> rose 2.2 percent.

Discover Financial Services added 6.3 percent to $9.47 after posting a smaller-than-expected quarterly operating loss on cost-cutting and as growth in bad loans cooled.

The S&P financial index <.GSPF> rose 2.1 percent, also reversing three days of losses.

Financials are strong and I still think the market revolves around financials, said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

Government data showed that though initial claims for jobless benefits exceeded expectations, continued claims posted their first drop since January, to 6.69 million from a revised 6.84 million the previous week, and marked the largest one-week drop in that series since November 2001.

The Philadelphia Federal Reserve's business activity index for the Mid-Atlantic region in June was still negative, but was much better than economists' expectations and the survey's May reading.

We've got some decent economic news so that's the story today, Saluzzi added.

The Nasdaq inched lower, reversing Wednesday's gains, weighed by shares of Microsoft , which fell 1 percent to $23.45 and erased their weekly gains.

The Dow Jones industrial average <.DJI> rose 66.06 points, or 0.78 percent, to 8,563.24. The Standard & Poor's 500 Index <.SPX> gained 7.89 points, or 0.87 percent, to 918.60. The Nasdaq Composite Index <.IXIC> dipped 0.49 of a point, or 0.03 percent, to 1,807.57.

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. At midday, the CBOE Volatility Index <.VIX> was slightly above the psychologically important level of 30, although it was down 4.4 percent for the day.

Shares of healthcare companies and other defensive names -- deemed better positioned to withstand a still uncertain economy -- also supported the stock market. Merck & Co Inc jumped 4.2 percent to $25.80, while McDonald's Corp gained 2.2 percent to $58.64.

(Editing by Jan Paschal)

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