The economy is showing faint signs of improvement and corporate profits are perking up from last year's dismal level, but Wall Street is disregarding those hopeful signs until the clouds of war lift.

That means any gains, like Friday's 2.6 percent jump for the Nasdaq composite index , could be short-lived until investors see whether the United States attacks Iraq and how the possible war plays out.

"Investors are holding off because of the high risks over the short run," said James Luke, director of growth management at BB&T Asset Management. "And there are definitely risks -- military action in Iraq could go wrong, or we could have terrorist activity in our country or one of our partner countries that could severely restrict our economy."

Stock gauges kicked off the year on a bright note as investors bet the economy was strengthening enough to bring a string of yearly losses to a close. But as worries about the costs and length of a possible war with Iraq gained footing, stocks sagged. The Standard & Poor's 500 index has dropped 5.1 percent so far this year.

Even sales data on Thursday that showed retail business in January posted its strongest gains in more than two years couldn't bring investors back.

"Iraq is the thing," said Edgar Peters, chief investment officer at PanAgora Asset Management in Boston. "The market is ignoring economic news, which is largely favorable, because they're afraid a war in the Middle East makes it irrelevant."

Stocks got a boost on Friday after Chief United Nations arms inspector Hans Blix told the U.N. Security Council his team has found only a small number of empty chemical munitions in its search for weapons of mass destruction. A positive financial outlook from computer maker Dell Computer Corp. also helped spur gains.

The S&P 500 and the Dow Jones industrial average advanced about 0.6 percent for the week, while the Nasdaq rose 2.2 percent for the week. The market gauges all snapped a four-week streak of losses.

Coming up, Wall Street will scan U.S. producer price and consumer price data on Thursday and Friday, respectively, for signs of possible inflation and trends in wholesale costs.

The earnings reporting schedule is light, but a few market heavyweights will offer up quarterly results, including retailer Wal-Mart Stores Inc. on Tuesday, drugmaker Pharmacia Corp. on Wednesday and oil company Halliburton Co. on Thursday.

U.S. financial markets will be closed Monday for the Presidents Day holiday.

Economic data has shown improvement, fanning hopes that once the potential war comes and goes, there will be a strong foundation for stock gains.

Manufacturing activity at U.S. factories rebounded by a stronger-than-expected 0.7 percent in early February as automakers cranked up production and utilities boosted output to cope with an unusually cold winter.

A separate report on Friday showed businesses stockpiled goods at a faster-than-expected 0.6 percent in December.

In addition, retail sales excluding motor vehicles and parts soared 1.3 percent in January. That was the largest increase since a matching gain in September 2000.

"The economy's turning up," said Charles Blood, director of financial markets strategy for Brown Brothers Harriman & Co.

Earnings, too, have seen a lift. Fourth-quarter profits for companies in the S&P 500 rose 9.5 percent from the same quarter a year ago, according to market research firm Thomson First Call. That's a far cry from the 21.5 percent tumble profits took in the fourth quarter of 2001.

And profits for the first quarter of this year are expected to rise 7.4 percent, up from the 11.5 percent slide they clocked last year, First Call said.

That has a few investors, like Peters, stepping up to the plate.

"We've been buying as the market has been declining," said Peters, who said his firm has been adding retail stocks including Sears . "The only negative thing we have going on is sentiment."

Peters said some of PanAgora's funds are now 76 percent stocks, or about 16 percent overweight against their usual benchmark.

But other investors are not so confident, even after a jump in stocks on Friday pushed market gauges into positive territory for the week.

"You need to remove the uncertainty," said Dan McMahon, head of listed trading at CIBC World Markets Inc. "If we are going in, then we go in and let's get it over with. If it goes as all the military planners say then that will be a positive. If we are not going in, whatever the peaceful resolution is, that's fine to. But markets don't like uncertainty."