Stocks rebounded Friday as dismal news on the manufacturing sector were offset by surprisingly good numbers from the U.S. employment front.

After declining through most of the morning, the Dow Jones industrial average changed direction at midday and closed up 78.47 at 10,990.41 according to preliminary calculations. The turnaround was helped by an announcement by AT&T, a Dow component, that it was raising basic residential calling rates, effective July 1.

Technology shares rose for a second day, pushing the Nasdaq composite index up 38.95 to 2,149.44. The broader Standard & Poor's 500 index was up 4.85 at 1,260.67. 

Alfred E. Goldman, director of market analysis at A.G. Edwards & Sons Inc. in St. Louis, said investors were heartened when the National Association of Purchasing Management's report of continued weakness in manufacturing didn't pull the market down sharply. 

``The money on the sidelines said, 'Whoops. I'd better start buying before the boat has left the dock,''' Goldman said.

The jobless rate fell to 4.4 percent from 4.5 percent in April, the Labor Department reported. Economists had expected an increase. The last time the jobless rate fell was in September 2000. 

``The market absolutely wants to see signs the economy is not weakening worse than expected,'' said Barry Hyman, chief investment strategist at Ehrenkrantz King Nussbaum. ``That will give us a better look toward earnings in the second half of the year. It will, however, dampen the possibility the Fed might be somewhat more aggressive than a 25-basis-point reduction (in interest rates) at the June meeting.'' 

Although the percentage of people out of work dropped, trends in nonfarm payrolls remained weak, the government said. The number of workers on U.S. payrolls outside the farm sector fell by 19,000 -- a modest decline close to the 17,000 contraction expected by economists in a Reuters poll. 

Adding to investors' dismay was the NAPM survey for May, which said the U.S. manufacturing sector sank deeper into recession in May, suffering a setback in its effort to claw out of a 10-month slump.

The NAPM's monthly gauge of industrial activity fell in May to 42.1 from 43.2 in April, but held above a decade low of 41.2 hit in January.

A reading under 50 indicates contraction in the manufacturing sector, while an index over 50 signals expansion.  

The payrolls and NAPM reports are two key pieces of economic data the market will study in assessing expectations for the June 26-27 meeting of the Fed's policy-making Federal Open Market Committee. 

Strategists expect a 25-basis-point reduction in U.S. interest rates. Whether the cut is even greater will be determined to a large extent by today's data, they said. 

``There are a lot of crosscurrents in the market,'' said Eugene G. Mintz, financial markets analyst at Brown Brothers Harriman & Co. in New York. 

He noted that investors are worried about second-quarter earnings, which he said ``could probably be the worst of the slowdown.'' Still, Mintz said, ``there's a lot of money sloshing around out there waiting to get into the market.'' He suggested that when investors began moving, it will be to buy.

AT&T rose 32 cents to $21.49 after the rate hike announcement. Competitor Sprint was up 65 cents at $20.96. BellSouth, meanwhile, took a hit of 67 cents, dropping to $40.56 on its warning that weak foreign currency exchange rates will cut its second-quarter earnings at least 5 cents a share. 

Among the technology shares, Intel rose $1.73 to $28.74, Oracle was up 56 cents at $15.86, and Microsoft rose $1.16 to $70.34. 

The Russell 2000 index was up 5.16 at 501.66. 

Advancing shares led declining shares 7 to 5 on the New York Stock Exchange, where volume was 1.004 billion shares, compared with 1.143 billion on Thursday. 

Overseas, Japan's Nikkei stock average fell less than a point to 13,261.84. Germany's DAX index rose 0.03 percent, while Britain's FT-SE 100 inched up 0.23 percent and France's CAC-40 dropped 0.23 percent.

The Associated Press and Reuters contributed to this report.