NEW YORK — Wall Street capped a week of big gains with another sizable advance Friday after investors set aside anxiety over news that the economy lost jobs last month and focused on Microsoft Corp.'s bid for Internet company Yahoo Inc. and a possible rescue plan for the troubled bond insurance sector.

The Dow Jones industrial average and the Standard & Poor's 500 index each rose more than 4 percent for the week, their steepest gains since March 2003.

Stocks fluctuated at times Friday, however, as investors weighed seemingly contradictory readings on the economy. Wall Street was pleased by Microsoft's $44.6 billion bid for Yahoo. Merger news, which often energizes stocks, has been in short supply for months. But the mix of economic news reminded investors of the continuing fallout from the housing and mortgage crisis.

The first blow came from the Labor Department's worrisome employment report for January. The economy lost 17,000 jobs, marking the first contraction of the labor market in more than four years. The news confounded economists, who were expecting 70,000 new jobs, according to Thomson/IFR. The unemployment rate fell to 4.9 percent from 5 percent in December, though the move came as the labor pool shrank.

The Commerce Department added to the fray, reporting that construction spending dropped 1.1 percent in December — the most in 15 months and twice what analysts expected.

And rating agency Moody's Investors Service warned on a conference call Friday that it expects to downgrade some bond insurers this month. A top rating is crucial for bond insurers to draw new business and for investors to feel secure about the bonds these companies already insure.

Stocks did get some ballast from a report showing a pickup in the nation's manufacturing sector in January. The Institute for Supply Management, a business group, said its index of manufacturing activity rose to 50.7 from 48.4 in December. Wall Street had expected the figure would come in at 47, a reading that would indicate a contraction of the manufacturing sector.

"We're starting to see the long-term investors and the fund mangers come back into the market. That's why I think you're seeing stocks rally even when there is negative news," said Marc Pado, U.S. market strategist for Cantor Fitzgerald.

The Dow Jones industrial average rose 92.83, or 0.73 percent, to 12,743.19 after climbing more than 200 points Thursday.

Broader stock indicators also moved higher. The Standard & Poor's 500 index rose 16.87, or 1.22 percent, to 1,395.42, and the Nasdaq composite index advanced 23.50, or 0.98 percent, to 2,413.36.

For the week, the Dow jumped 536.02 points, or 4.4 percent. The Standard & Poor's 500 index, the market measure most closely followed by professional traders, added 4.9 percent and the Nasdaq composite index rose 3.8 percent.

The Russell 2000 index of smaller companies rose 17.20, or 2.41 percent, Friday to 730.50.

Advancing issues outnumbered decliners by more than 3 to 1 on the New York Stock Exchange, where volume came to 1.79 billion shares compared with 2.19 billion shares traded Thursday.

Bond prices showed little movement. The yield on the benchmark 10-year Treasury note, which moves opposite its price, stood unchanged at 3.59 percent from late Thursday.

The dollar rose against most other major currencies, while gold prices fell.

Light, sweet crude oil fell $2.79 to settle at $88.96 per barrel on the New York Mercantile Exchange after the employment report raised concerns that the U.S. economy will slow and hurt demand for oil.

Stocks climbed Friday after a week in which Wall Street saw huge gains but also enormous volatility. The week began with a sharp advance as investors awaited the Federal Reserve's decision on interest rates. Stocks extended their gains Tuesday and on Wednesday the central bank delivered on a widely expected half-point cut in interest rates. But unease about bond insurers short-circuited a rally in stocks after the rate cut. Stocks sold off again early Thursday but performed an about-face to close sharply higher as investors considered the effects of rate cuts and the possibility that the government might orchestrate a rescue for the trouble bond insurance market.

The latest rate cut meant the Fed had slashed rates by an unprecedented 1.25 percent in little more than a week, a move that appeared to largely erase doubts about whether the central bank would step in to assuage investors' fears about the health of the financial sector and, more broadly, of recession.

"We expect volatility will remain elevated but will abate slowly because we think some of the recession talk will wane but not go completely off the table," said Nicholas Raich, director of equity research at National City Private Client Group in Cleveland.

"There's no certainty and there's no clarity but valuations are cheap so there a lot of bottom-fishers in here looking for bargains," he said, referring to questions investors still have about the health of the financial sector.

The week's gains restored some of the huge losses seen in the earliest days of the year. Still, stocks this week finished what was their worst January since 1990. The Standard & Poor's 500 index lost 6.1 percent for the month.

Bond insurers showed gains Friday amid word that efforts are moving ahead to aid the troubled bond insurance market, though no proposal was imminent.

A person with direct knowledge of discussions between banks and regulators about a possible bailout told The Associated Press that several plans were under consideration, though one that examined each company's needs was the most likely option. The person asked not to be named because he was not authorized to speak publicly.

Ambac Financial Group Inc. rose $1.56, or 13 percent, to $13.20, while MBIA Inc. rose 86 cents, or 5.6 percent, to $16.36.

In corporate news, Yahoo surged $9.20, or 48 percent, to $28.38, on word of the buyout offer for $31 per share. Yahoo said it would consider the offer. Microsoft, one of the 30 stocks that make up the Dow industrials, fell $2.15, or 6.6 percent, to $30.45.

Google Inc. fell $48.40, or 8.6 percent, to $515.90 after reporting its fourth-quarter earnings and revenue growth slowed at a faster pace than Wall Street expected.

Motorola Inc. jumped $1.19, or 10 percent, to $12.69 after announcing it is considering selling a sale or spinoff its lackluster mobile phone business.

Overseas, Japan's Nikkei closed down 0.70 percent. Britain's FTSE 100 finished up 2.54 percent, Germany's DAX index gained 1.71 percent and France's CAC-40 rallied 2.22 percent.