Stocks rose Friday, with the Dow posting its biggest weekly gain since May, as investors bet the Federal Reserve would pause in its campaign to raise interest rates due to economic fallout from Hurricane Katrina.

The major stock indexes finished higher for the second straight week. The Dow Jones industrial average (search) rose 2.2 percent this week, its biggest gain since May 22. The Standard & Poor's 500 index (search) ended the week 1.9 percent higher, and the Nasdaq Composite Index (search) advanced 1.6 percent.

The Dow rose 2.2 percent this week, its biggest gain since May 22. The S&P ended the week 1.9 percent higher, and the Nasdaq advanced 1.6 percent.

Falling energy prices lent to a brighter economic picture in Katrina's wake, with crude oil sliding despite worries about record-high energy costs this winter and continued refinery shutdowns and gasoline futures slipping below $2 a gallon. Investors also anticipated a burst of activity once reconstruction begins in the Gulf region.

"The market seems to be concentrating on the future rebuilding of the devastated area, and I think that's what's keeping the market from declining," said Peter Cardillo, chief strategist at S.W. Bach & Co.

Revised forecasts from chipmakers Texas Instruments Inc. (TXN) and Intel Corp. (INTC) late Thursday bolstered the market with indications that consumer spending remains healthy. Texas Instruments raised its quarterly estimates — fueling hopes for greater electronics demand and calming fears of a spending slowdown — while rival Intel Corp. refined its previous view.

"Texas Instruments is hitting a new high and that's always encouraging," said Cummins Catherwood, managing director, Walnut Asset Management in Philadelphia. "There are these points of light that are stimulating interest in technology, and it's a developing trend that's positive."

Light trading volume — typical of a late-summer session — persisted on Wall Street, as investors awaited more information about the rising damage toll left by Katrina and searched for any signals that the economic retreat will be less than feared. Nonetheless, falling oil prices led to a strong week for Wall Street. The Dow gained 2.21 percent, the S&P climbed 1.93 percent and the Nasdaq rose 1.61 percent for the week.

Stocks also were helped this week by the growing belief among investors that the
Federal Reserve (search) will halt its yearlong string of interest-rate hikes when it meets later this month, in part to contain lending costs for Gulf Coast reconstruction. But one analyst expressed confidence that the Fed will lift the nation's benchmark rate by another quarter point despite concerns about inflation and fallout from the storm.

"Right now, I believe they will raise the rate by 25 basis points. They have been very clear telegraphing what they plan to do," said Paul Cherney of Cherney Market Analysis. "They're going to have to address (Katrina's impact) in some fashion, but they'll probably use plain vanilla, uninspiring wording."

Oil futures traded lower even after the Department of Energy said domestic energy costs this winter would be the highest in 10 years, and that at least four Gulf coast refineries would remain closed for months. A barrel of light crude dropped 41 cents to $64.08 on the New York Mercantile Exchange (search), where gas futures declined 7.6 cents to $1.96 a gallon.

Exxon Mobil Corp. (XOM) was among Friday's biggest gainers even as crude prices fell for the day. Exxon, the world's largest publicly traded oil company, rose 3 percent to $63.20, while Chevron (CVX) advanced 2.8 percent to $63.81.

While Intel said business remains within expectations and narrowed its quarterly revenue target, Texas Instruments lifted both its profit and revenue forecasts, citing greater demand across most of its segments. Texas Instruments was higher through most of Friday's session, but closed down 3 cents to $33.74. Intel declined 84 cents to $25.25.

In technology news, shares of chip maker PalmSource Inc. (PSRC) soared after Japanese software developer Access Co. said it would make the U.S software company wholly owned in a $324 million cash deal. Shares soared 78 percent to $17.98 on Nasdaq.

Airline stocks fell after Continental Airlines Inc. (CAL) warned of a "significant loss" for 2005, as soaring fuel costs continue eating into the $300 million the carrier expected to save this year from job and benefits cuts. Northwest Airlines Corp. (NWAC) also plans to lay off two-thirds of its mechanics and ask for $200 million in concessions in its latest proposal to its mechanics union, which has been on strike for three weeks. Continental dropped 49 cents to $12.11, and Northwest was down 4 cents at $3.48.

Boeing Co. (BA) is negotiating a settlement with the Justice Department that could require the aircraft maker to pay as much as $500 million to avoid prosecution in two federal probes, The Wall Street Journal said. The deal would resolve allegations that Boeing stole proprietary documents from rival Lockheed Martin Corp. (LMT), and illegally recruited a senior military official while she still had oversight of Boeing contracts. Boeing jumped 47 cents to $65.09.

Trading was active, with 1.5 billion shares changing hands on the New York Stock Exchange, just above the 1.46 billion daily average for last year. About 1.6 billion shares were traded on Nasdaq, below the 1.81 billion daily average last year.

The number of stocks rising on the New York Stock Exchange outnumbered those falling by more than 2 to 1. On Nasdaq, advancers led decliners by about 2 to 1.

The Russell 2000 index of smaller companies rose 4.58, or 0.68 percent, to 678.05.

Overseas, Japan's Nikkei stock average rose 1.26 percent. Britain's FTSE 100 climbed 0.35 percent, Germany's DAX index was up 0.26, and France's CAC-40 was higher by 0.58 percent.

Reuters and the Associated Press contributed to this report.