Stocks extended their Santa Claus rally Wednesday as a sharp drop in oil prices and a surprise jump in the nation's gross domestic product encouraged buying. The Dow Jones industrials and the Standard & Poor's 500 index both reached new 3 1/2-year highs.

The Dow Jones industrial average (search) rose 56.46 points, or 0.52 percent, to 10,815.89. The broad Standard & Poor's 500 Index (search) was up 4.12 points, or 0.34 percent, at 1,209.57. The Nasdaq Composite Index (search) added 6.12 points, or 0.28 percent, at 2,157.03.

Fannie Mae helped the S&P 500 Index, rising 2 percent one day after two top executives stepped down. The announcement came after months of scrutiny of Fannie Mae's accounting.

Battered-down drug stock Pfizer (PFE) continued to rebound from a sharp fall on Friday and was the biggest percentage gainer on the blue-chip Dow.

U.S. light crude futures slid $1.46 to $44.30 a barrel after the U.S. government reported an unexpected rise in crude and distillate stocks.

"There was a surprise build up in crude, which is sending oil prices down and that's good news for company profits," said Peter Cardillo, chief market analyst and chief strategist at SW Bach and Co.

Stocks were also aided by data from the Commerce Department (search) showing that U.S. economic growth was stronger than previously thought in the third quarter.

"I think the market is reasonably satisfied that, with the very small upward revision to third-quarter GDP and with energy weakening again, there's no particular reason why the economy should stop growing in 2005," said Christine Callies, managing director and chief market strategist, Bessemer Trust.

Traders also pointed to the so-called "Santa rally" as a reason for stocks gaining. This is a seasonal phenomena that typically sees stocks rallying sometime during the last five days of the year and the first two in January.

Callies said it would take a "pretty significant negative news development to put the brakes on this recovery".

Lower crude prices are beneficial to stocks as lofty oil prices shrink corporate profits due to higher energy costs. Increased oil costs also curbs consumer spending. The Energy Information Administration said U.S. crude stocks rose last week by 2.1 million barrels and distillate inventories rose 600,000 barrels. Analysts surveyed by Reuters expected both stockpiles to fall.

"Right now, the market is moving on any headline that moves over the wires, and right now the news is pretty good," said Jack Caffrey, equities strategist at J.P. Morgan Private Bank. "That's what happens in a slow week, like we're having. We'll probably drift higher this way until earnings season next month."

The Commerce Department (search) issued its final take on third-quarter gross domestic product. The economy grew at a 4 percent rate during the July-to-September period, better than the 3.9 percent rate previously estimated. The result also showed an improvement from the 3.3 percent rate seen in the second quarter.

The GDP report gave many investors hope that the fourth-quarter reading will be stronger than expected. Analysts had feared that low job growth high energy prices would stifle economic growth. Oil prices, in particular, were seen as an extra drain on consumers' incomes, but the Commerce Department figure may assuage some of those concerns.

Pfizer helped support the Dow and S&P, rising 3.9 percent, or 98 cents, to $25.95. The drug company was the New York Stock Exchange's most actively traded issue.

Pfizer added to gains made on Tuesday, which came after a study of Alzheimer's patients eased investors' fears that U.S. regulators will force Pfizer to withdraw its arthritis drug Celebrex. On Friday, Pfizer's stock slid 11 percent after a cancer-prevention study showed that large doses of the drug increased the risk of heart attack.

Starbucks Corp. (SBUX) helped the Nasdaq, rising 3.7 percent, or $2.18, to $61.14 after broker Smith Barney raised its 2005 earnings-per-share estimates for the stock.

Microsoft Corp. (MSFT) slipped 10 cents to $26.97. The company lost a European Union court appeal on Wednesday to delay sanctions that will force it to change business practices and immediately market a stripped-down version of Windows.

The "Microsoft news was obviously on people's minds" when trading opened, said Frederic H. Dickson, Chief Market Strategist at D.A. Davidson & Co.

Investors also hoped that mortgage giant Fannie Mae (FNM) can move beyond its accounting scandals now that chief executive Franklin Raines and chief financial officer J. Timothy Howard are departing. The company is the biggest player in the country's $8 trillion mortgage market.

Fannie Mae's stock has suffered since Sept. 22, when the company said the Securities and Exchange Commission (search) was investigating its finances. It fell to a 52-week low of $63.40 on Oct. 4, but has recovered somewhat as the investigations continued. On Wednesday, news of the resignations sent shares of Fannie Mae climbing $1.57 to $71.92.

Resarch in Motion Ltd. (RIMM), maker of the popular Blackberry e-mail pager, surpassed Wall Street earnings estimates by 3 cents per share, but its profit outlook for future quarters fell below analysts' expectations. Research in Motion tumbled $3.55, or 4.08 percent, to $83.49.

The Boeing Co. (BA) said Japan Airlines has agreed to buy 30 of the aerospace company's new 7E7 dreamliners, with an option to buy 20 more. Terms were not disclosed, but analysts valued the deal at $4 billion. Boeing rose 49 cents to $53.91.

Trading volume was active, but market watchers said it was slowing as the day progressed.

There were 1.39 billion shares changing hands on the New York Stock Exchange, just below the 1.4 billion daily average for last year. About 1.8 billion shares were traded on Nasdaq, above the 1.69 billion daily average last year.

Advancers outnumbered decliners by 10 to 7 on the NYSE, 9 to 7 on Nasdaq.

The Russell 2000 index of smaller companies was up 2.26, or 0.35 percent, at 648.46.

Overseas, Japan's Nikkei stock average rose 0.78 percent. In Europe, Britain's FTSE 100 closed up 0.94 percent, France's CAC-40 climbed 0.96 percent for the session, and Germany's DAX index gained 0.64 percent.

Reuters and the Associated Press contributed to this report.