Some of the initial pop in prices faded into the close, however, with Wall Street still seen subject to sharp swings. The Dow hit an intraday high up 1.6 percent but closed up 1.2 percent.
"I can't imagine it as the start of the big move up because there are still many issues out there," said John Manley, chief equity strategist at Wells Fargo Funds Management in New York.
The Dow Jones industrial average <.DJI> gained 155.38 points, or 1.24 percent, to 12,651.76. The Standard & Poor's 500 Index <.SPX> rose 14.22 points, or 1.08 percent, to 1,329.10. The Nasdaq Composite Index <.IXIC> added 17.72 points, or 0.63 percent, to 2,836.33.
Each trading day this week has been almost a reverse image of the previous one, with the market rising around 1 percent one day only to fall by about the same margin the next. That has left the S&P 500 flat on last Friday's close.
"We have been in an extended period of not just volatility but dysfunction for quite some time, and it seems as though just recently that dysfunction has taken on a whole other dimension," said Peter Kenny, managing director at Knight Capital in Jersey City, New Jersey.
"The volatility is in such short bands of time that even traders tend to get less enthusiastic about catching inefficiencies and trading trends because of the whipsaw; the risk reward is not attractive."
Economic data on Thursday added to recent evidence of a slowing recovery, with an unexpected rise in the number of Americans filing new claims for unemployment benefits last week.
Some investors are hoping the Federal Reserve may signal more easy money to counter sluggish growth when it releases its policy statement next Wednesday at the close of a two-day meeting.
Trading came on low volume after the weak data in the U.S. labor market and rising bond yields in Italy and Spain weighed on investor sentiment. About 6.6 billion shares changed hands on the NYSE, the Nasdaq and the Amex, 7 percent below the 20-day moving average.
"This is a classic rumor-driven market where the nervous shorts cover their shorts and the under-invested longs go and buy, just by looking at the headlines. There is the fear of missing out," said James Dailey, portfolio manager of TEAM Asset Strategy Fund.
That kind of sentiment was highlighted as Greek bank stocks surged more than 20 percent on Thursday, with speculators appearing to be betting on a favorable pro-bailout outcome after Sunday's election. The action there drew the attention of traders on Wall Street.
In other U.S. data, consumer prices fell 0.3 percent in May, the biggest drop in more than three years, which could also give the Fed room to ease policy next week.
"What you are seeing today is investors really embracing two things: inflation expectations and the slowdown in the recovery and the jobs market and what that means for maybe future quantitative easing," said Joshua Schachter, portfolio manager at Snow Capital Management in Sewickley, Pennsylvania.
Moody's Investor Service cut its rating on Spanish government debt on Wednesday by three notches to Baa3, saying the euro zone plan to help Spain's banks will add to the country's debt burden.
On Thursday, Egan-Jones cut France's sovereign credit rating to BBB-plus with a negative outlook, citing expectations that France's funding costs will see more pressure as the euro zone sovereign debt crisis continues to roil markets.
In company news, Nokia Corp said it plans to cut another 10,000 jobs, a fifth of its work force, and said its phone unit would post a deeper-than-expected loss in the second quarter because of tough competition. It's U.S.-listed shares of Nokia plunged 15.8 percent to $2.35.
(Additional reporting by Chuck Mikolajczak and Angela Moon; Editing by Leslie Adler)