Stocks closed higher Friday as investors eyed with optimism unemployment data that showed job losses were less severe in December than in the previous two months.

The Dow Jones Industrial average soared 87.6 points, or 0.86 percent,  to close at 10,259.74. The technology-laced Nasdaq Composite Index was up 15.11 points, or 0.74 percent, to close at 2,059.38, while the broader Standard and Poor's Index ended up 7.24 points, or 0.62 percent, to close at 1,172.51.

It was the Nasdaq's highest close in about five months, while the Dow and the S&P both closed at four-month highs.

Friday's trading pushed major market gauges to their highest close since August, amid news job losses are bottoming out and hopes for a turnaround in corporate profits.

The Labor Department reported Friday that the nation's unemployment rate increased to 5.8 percent in December as businesses trimmed 124,000 jobs. Still, the losses were not as bad as they had been. Job losses had averaged about 400,000 a month in October and November.

Stocks rallied on the unemployment data. A key gauge of the vast U.S. services economy also added to growing optimism over the economy by registering growth for a second straight month in December

"The news coming out is incrementally positive and we've seen additional data points that just firm up investors feeling of confidence that the market has found a base and is starting to turn," said Jon Baranko, director of trading at Strong Capital Management, which oversees $50 billion.

Optimism over the economy and the market has been mounting since Sept. 21, when stocks slumped to three-year lows in the wake of the assaults on the United States. Investors are confident the economy, which fell into recession last March, will rebound in 2002, but concern has hung over the market that stocks prices have outpaced earnings prospects.

Tech giants like software maker Sun Microsystems, up 51 cents at $13.93, led the Nasdaq higher, while shares of brokerages like Morgan Stanley and some Internet companies got help from upbeat comments by Wall Street analysts.

Brokerage stocks surged after Wall Street house Prudential Securities said it had raised its rating for the brokerage industry amid signs the economy may climb out of recession this year. Merrill Lynch jumped $2.98 to $56.64. Goldman Sachs rose $4.30 to $96.75. Morgan Stanley added $2.82 to $59.64.

Internet stocks like eBay Inc. got a modest boost after Merrill Lynch said the fourth quarter of 2001 could mark the trough in the fundamentals of the Internet sector as online commerce grabs a bigger share of the retail market and online advertising stabilizes. Shares of eBay rose 50 cents to $68.50.

Halliburton Co. plunged sharply but recouped some of its loss, ending down 69 cents to $10.22 in heavy trading on the New York Stock Exchange. Investors continued to fret about mounting asbestos liabilities.

Timber company Willamette Industries Inc. fell $4.21 to $45.75 after it rejected a sweetened $6 billion acquisition offer from rival Weyerhaeuser Co., signaling a possible end to a 15-month-long hostile takeover battle.

Kmart Corp. staged a rebound Friday after falling sharply in recent sessions amid speculation the discount retail chain could face bankruptcy. It rose 62 cents to $4.71.

Toys R Us Inc. rose almost 11 percent as investors expected the No. 2 U.S. toy retailer to post a solid holiday sales next week and an analyst upgraded the stock to ``buy.'' It climbed $2.17 to $22.

In the past few days, the market has rallied significantly, achieving levels not seen since late summer. The Dow appears to have comfortably broken through the 10,000 level, while the Nasdaq is hovering above 2,000. Market watchers say they are encouraged but suggest caution, rather than exuberance, is the best approach for investors.

For the week, which included only four trading days due to New Year's Day, the Dow gained 1.2 percent, the Nasdaq rose 3.6 percent and the S&P 500 gained 1 percent.

Over the first three trading days of 2002, the Dow is up 2.4 percent, the Nasdaq has risen 5.5 percent and the S&P 500 has gained 2.1 percent.

Advancing issues outnumbered decliners nearly 2 to 1 on the New York Stock Exchange. Volume came to 1.49 billion shares, up from 1.41 billion shares at the same point in the previous session.

The Russell 2000 index rose 3.79 to 499.30.

Overseas, Japan's Nikkei stock average rose 3.1 percent. In Europe, Germany's DAX index gained 0.9 percent, Britain's FT-SE 100 rose 0.1 percent, and France's CAC-40 was essentially unchanged.

The Associated Press contributed to this report.