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NEW YORK (AP) - The Nasdaq composite index posted its best finish in 10 months Friday as buyers grew increasingly confident of a rebounding economy. Airline stocks surged after Merrill Lynch said the worst of the industry's troubles seemed to be over.

Analysts said investors were unfazed by a jump in the unemployment rate and pleased by a jump in factory orders, giving the Nasdaq and Standard & Poor's 500 index their third straight winning week. The Dow Jones industrials, meanwhile, climbed 128 points.

"Optimism is certainly returning to the market," said Richard Nash, chief market strategist at Victory Capital Management. "Most folks have been willing to ignore the subpar economic data because most of it has been backward-looking. They know the March-April period was affected by the war."

The Nasdaq gained 30.32, or 2.1 percent, to 1,502.88, the highest level seen since June 18, 2002, when it closed at 1,542.96. The S&P rose 13.78, or 1.5 percent, to 930.08, the best level since Jan. 14.

The Dow, meanwhile, closed up 128.43, or 1.5 percent, at 8,582.68, following a two-day loss of 48.74 points. It was the highest level since Jan. 17, when the blue chips finished at 8,586.74.

For the week, the three main gauges finished higher, with the Dow up 3.3 percent, the Nasdaq higher 4.8 percent, and the S&P up 3.5 percent. The Dow rebounded from a loss last week.

The Labor Department reported Friday that the nation's unemployment rate rose to 6 percent in April. Last month's jobless rate was up two-tenths of a percentage point from March, with payrolls falling by 48,000. April's reading matched economists' estimates.

But the Commerce Department said orders to U.S. factories rose 2.2 percent to $329.96 billion in March, following a revised 1 percent fall in February. The gain was larger than analysts' expectations.

"While the jobs report was weak, there was some trader talk that this report would come in at minus 100,000 jobs. So it wasn't as bad as folks thought," Nash said.

Wall Street has rallied in recent weeks on better-than-expected earnings, but analysts say investors are now looking for signs the economy will rebound by year's end before committing further to stocks. This week, the economic data has been mixed, including an April drop in manufacturing activity reported Thursday.

"It's a curious day because I thought the jobs report came out mixed at best," said John C. Forelli, portfolio manager for Independence Investments in Boston. "But investors are willing to extend their timeline for waiting for an economic recovery."

Still, he added, "in general, we've been in a trading range for the market for pretty close to a year now. We're at the top end of that range and to have a breakthrough there, I think we're going to need some clear evidence the economy is improving."

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Airline stocks were winners after Merrill Lynch upgraded the sector, saying that while the industry is likely to again lose money this year, it has seen the worst of its problems. Continental surged $1.94 to $11.80, while Delta climbed $1.75 to $14.75 and American Airlines parent AMR rose 66 cents to $5.47.

Dow component Boeing, the world's largest manufacturer of commercial jets, also gained on the news, rising $1.51 to $28.62.

ChevronTexaco climbed $2.35 to $65.35 after the oil company reported first-quarter operating earnings that handily beat Wall Street's estimates.

Tech stocks also surged, led by Microsoft which rose 44 cents to $26.15, and Intel, which gained 50 cents to $19.05.

Decliners included Cigna, which fell $2.87 to $50.78, after the health insurer reported first-quarter operating earnings that beat analysts' expectations.

Advancing issues outnumbered decliners more than 3 to 1 on the New York Stock Exchange. Volume was moderate.

The Russell 2000 index, which tracks smaller company stocks, rose 8.84, or 2.2 percent, to 407.67.

Overseas, Japan's Nikkei stock average finished 0.6 percent higher Friday. In Europe, France's CAC-40 rose 0.3 percent, Britain's FTSE 100 gained 1.9 percent and Germany's DAX index advanced 1.5 percent.

Copyright © 2003 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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