Stocks extend gains after better-than-expected report

NEW YORK -- Stocks showed broad gains Wednesday after a stronger-than-expected reading on the health of the service sector and figures on worker productivity calmed some fears about the frailty of the economy.

Investors also kept tabs on bond insurer Ambac Financial Group Inc. for any confirmation of a bailout plan for the struggling company. Trading in Ambac shares was halted for pending news around midday amid reports a deal was imminent.

Earlier, the Institute for Supply Management reported that activity in the service sector declined in February, though the decrease wasn't as steep as Wall Street had feared. The ISM index of non-manufacturing activity came in at 49.3. Analysts had expected a reading of 46.5, according to Dow Jones Newswires.

The ISM report was particularly gratifying to Wall Street after a stunning drop in the January service sector index had sent stocks plunging when it was released a month ago.

The service sector findings offset some unease about a Labor Department report that showed labor costs rose at a 2.6 percent annual pace in the fourth quarter. Rising costs often draw concern from investors because the increases can make it harder for the inflation-wary Federal Reserve to justify cutting interest rates to boost the economy.

However, the report also found that productivity -- or workers' hourly output -- rose at an annual pace of 1.9 percent.

Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams, pinned the market's rally to a follow-through from a recovery Tuesday as well as the economic figures.

But he remains cautious. "I still think you should sell into the rallies," he said.

In midday trading, the Dow Jones industrial average rose 82.47, or 0.68 percent, to 12,296.27.

Broader stock indicators also carved gains. The Standard & Poor's 500 index rose 10.32, or 0.78 percent, to 1,337.07, while the Nasdaq composite index rose 20.16, or 0.89 percent, to 2,280.44.

The move higher came a day after uncertainty about the economy prompted erratic trading. Stocks recovered from a sell-off to finish mixed following reassuring comments from Cisco Systems Inc. about its business and amid rumors that plans to help Ambac were moving ahead.

CNBC reported Wednesday that a group of banks were close to sewing together a rescue plan to keep the company from faltering under a weight of bad debt. The stock recently changed hands up 63 cents, up 5.9 percent, at $11.35.

Bond prices fell Wednesday as stocks rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.68 percent from 3.63 percent late Tuesday.

The dollar was mixed against other major currencies, while gold prices rose.

Light, sweet crude rose $2.05 to $101.57 on the New York Mercantile Exchange.

John Merrill, chief investment officer at Tanglewood Capital Management in Houston, said he is skeptical of the sustainability of the rally given the economic figures arriving since late last year.

"The prevailing trend, although it's always choppy, is down," he said. "You're always going to have outlier numbers," he said, referring to economic figures that don't conform.

Merrill remains uneasy about the broad fallout from cracks in the credit markets and said the spread of troubles to areas once regarded as essentially impregnable, such as municipal bonds, is unnerving.

"The banks are being hit in so many different directions," he said. "We're seeing ever more ripple effects of the attack on their capital and so it's showing up in places where you would've never dreamed up showing up a month ago," he said, citing concerns about the health of the municipal bond market.

In other corporate news, Pfizer Inc. affirmed its 2008 sales and profit forecasts and said it plans to outsource more drug manufacturing and reduce its global real estate holdings to lower costs. The drug maker, one of the 30 stocks that make up the Dow industrials, is cutting costs ahead of generic competition for its blockbuster cholesterol drug, Lipitor. Pfizer slipped 9 cents to $22.15.

Advancing issues outnumbered decliners by more than 2 to 1 on the New York Stock Exchange, where volume came to 633.8 million shares.

The Russell 2000 index of smaller companies rose 4.86, or 0.71 percent, to 685.84.

Overseas, Japan's Nikkei stock average closed down 0.16 percent. In afternoon trading, Britain's FTSE 100 rose 1.29 percent, Germany's DAX index rose 1.93 percent, and France's CAC-40 advanced 1.54 percent.