Stocks rose cautiously Thursday, taking a breather after three days of gains, as a larger-than-expected drop in weekly unemployment insurance claims and a decline in a gauge of future economic activity kept many investors on the sidelines.

The Dow Jones industrial average rose 28.74 to 10,493.19 — up 0.27 percent for the day and nearly 3.5 percent for the week — after wavering in a narrow range through the day. The Standard & Poor's 500 index (search) rose 5.52, or 0.47 percent, to 1,191.08. The Nasdaq composite index (search) rose 11.93, or 0.59 percent, to 2,042.58.

Blue chip shares overcame several slips into negative territory to manage a modest gain, extending this week's rally by the Dow Jones industrial average to more than 350 points.

"We've had a great week," said Todd Leone, head of listed trading at S.G. Cowen. "They can't keep it down. I thought we might rest a little today -- but money is flowing back into the market."

In economic news, U.S. Mid-Atlantic factory activity fell in May to the lowest in nearly two years, according to the Federal Reserve Bank of Philadelphia (search).

The Philadelphia Fed said its business activity index skidded to 7.3 in May from 25.3 in April, the largest one-month drop since January 2001. The May reading was sharply below a Wall Street forecast for a drop to 19.0, according to economists polled by Reuters. A measure above zero denotes growth in the sector.

However, other data Thursday showed an improved U.S. labor market last week. The government said the number of Americans filing new claims for unemployment benefits fell by 20,000 last week.

First-time claims for state jobless aid fell to 321,000 in the week ended May 14 from an upwardly revised 341,000 the previous week, the Labor Department said. Analysts on average had been looking for jobless claims of 330,000.

A strong labor market has helped drive the Federal Reserve's (search) policy of gradually rauising interest rates to prevent an inflationary spurt in the economy's growth.

On the closely watched energy front, oil futures slipped below $47 a barrel, settling at a new three-month low, after a sharp decline Wednesday driven by a report showing more strong growth in U.S. crude supplies.

Many analysts predict crude will continue falling in the long-term — prices have dropped more than $10 since their all-time peak of $58.28 on April 4 — but investors remain leery.

The Dow's biggest gainers were Exxon Mobil Corp. (XOM) and General Motors Corp (GM). Exxon Mobil rose $1.18, or 2.2 percent, to $54.83, while GM advanced $1.14, or 3.6 percent, to $32.75. After the close, GM announced that its board has decided the company is "neutral" with respect to Tracinda Corp.'s offer to purchase up to 28 million GM shares at $31 apiece. While the Tracinda offer has boosted GM's share price, the stock has been hurt by Standard & Poor's downgrade of the company's credit rating to "junk" status.

DuPont Co. (DD) fell almost 1 percent, or 43 cents, to $47.61, dragging on the Dow, after it said a federal grand jury is seeking documents on a chemical used in manufacturing Teflon nonstick coatings that has been the subject of safety questions.

Motorola Inc. (MOT) climbed 2.4 percent to $17.31. The world's second-biggest mobile phone maker said its board had authorized its first-ever stock buyback program, allowing it to repurchase up to $4 billion worth of its shares in the next three years.

Netflix Inc. (NFLX) closed just 63 cents, or 4.1 percent, higher at $16.13, despite jumping as much as 24 percent on news the online DVD rental company has reached a deal to run that Wal-Mart Stores Inc.'s (WMT) competing service.

AnnTaylor Stores Corp. (ANN) rose 62 cents, or 2.5 percent, to $25.95 after the women's apparel retailer reported its first-quarter profit fell by nearly half, but posted better-than-expected sales for its first quarter.

Payless ShoeSource Inc. (PSS) rose $2.15, or 15.2 percent, to $16.28 after the discount footwear retailer said its first-quarter profit more than doubled, soundly beating Wall Street estimates.

Trading was moderate, with 1.38 billion shares changing hands on the New York Stock Exchange, below the 1.46 billion daily average for last year. About 1.74 billion shares were traded on Nasdaq, just below the 1.81 billion daily average last year.

Advancing stocks outnumbered decliners on the NYSE by almost 7 to 4 and on Nasdaq by roughly 17 to 14.

The Russell 2000 index of smaller companies rose 2.58, or 0.42 percent, to 610.46.

Overseas, Japan's Nikkei stock average rose 2.2 percent and Germany's DAX index rose 0.8 percent, while Britain's FTSE 100 and France's CAC-40 both rose 0.3 percent.Overseas, Japan's Nikkei stock average rose 2.2 percent. In afternoon trading, Britain's FTSE 100 was up 0.3 percent, Germany's DAX index was up 0.8 percent, and France's CAC-40 was up 0.3 percent.

Reuters and the Associated Press contributed to this report.