updated 2/16/2007 8:10:33 AM ET 2007-02-16T13:10:33

Wall Street extended its February rally Thursday, growing confident that interest rates will hold steady even as Federal Reserve Chairman Ben Bernanke tempered his forecast of slowly cooling growth and inflation with a reminder that price pressures remain a concern.

Major Market Indices

The Dow Jones industrial average stretched its three-day advance to more than 200 points, the first such jump since August 15-17 last year, and had its second straight record close. The rally, triggered Tuesday by signs of an uptick in mergers and acquisitions, was given new life Thursday by a report that the world’s two largest beermakers, InBev SA and Anheuser-Busch, are considering joining forces.

The bustle of takeover talk coupled with Bernanke’s comments to Congress have helped send stocks soaring. Bernanke’s comments Thursday were similar to a day earlier, but he added that inflation could once again pick up, which reminded investors that a rate increase isn’t out of the question. That note of caution limited the market’s climb.

The prospect of a rate hike looked pretty dim, however, after most of the economic reports released Thursday. The reports showed a big jump in unemployment claims last week, a huge drop in industrial output in January due to large cutbacks and layoffs in the auto industry, and weaker-than-expected manufacturing in the Philadelphia region.

“The Fed is still data-driven, so we will be looking at the data in the ensuing months,” said Jim Herrick, manager of equity trading at Baird & Co. “There’s a strong possibility we’ll continue this uptrend.”

Also boosting the market were a stock buyback by heavy equipment maker Caterpillar Inc., an analyst upgrade of chip maker Qualcomm Inc., and Boeing Co. finalizing an order from United Parcel Service Inc. for 27 cargo planes.

According to preliminary calculations, the Dow Jones industrial average was up 23.15, or 0.18 percent, at a record close of 12,765.01, after reaching a new trading high of 12,779.03.

Broader stock indicators were also higher. The Standard & Poor’s 500 index was up 1.51, or 0.10 percent, at 1,456.81, and the technology-laden Nasdaq composite index was up 8.72, or 0.35 percent, at 2,497.10.

Bonds rose, with the yield on the benchmark 10-year Treasury note falling to 4.71 percent from 4.74 percent late Wednesday.

The Federal Reserve reported Thursday that output at U.S. factories, mines and utilities was down 0.5 percent in January, and the Labor Department reported that the number of newly laid off workers jumped last week to the highest level since late November.

Also Thursday, the Philadelphia Fed survey showed near-flat manufacturing activity in that region, and the first drop in employment in more than three years. The report, which would help make the case for at least stable interest rates, did not have a big effect on bond trading.

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

Oil prices fell a penny to settle at $57.99 a barrel on the New York Mercantile Exchange, stemming a tumble sparked a day earlier by a smaller-than-expected decrease in U.S. heating oil inventories and forecasts of warmer weather to come in the Northeast.

Financial results from oil services provider Baker Hughes Inc. that missed analysts’ expectations pressured some companies in the energy sector. Baker Hughes fell $6.62, or 9.2 percent, to $65.32.

But overall, blue chip stocks performed well Thursday, especially as hopes for an uptick in takeover activity were reinvigorated when Sao Paulo business daily Valor Economico reported that InBev held preliminary merger talks with Anheuser-Busch.

Anheuser-Busch rose $1.49, or 3 percent, to $51.72.

Also buoying blue chip stocks was Caterpillar’s announcement that it plans to repurchase $7.5 billion in stock within the next five years, and Boeing finalizing an order worth $3.6 billion from package delivery company United Parcel Service Inc. for 27 cargo planes.

Caterpillar rose $1.54, or 2.3 percent, to $67.70.

Boeing rose $1.83, or 2 percent, to $91.77.

An analyst upgrade of Qualcomm cheered some investors in technology stocks, offsetting some discouraging news that Internet phone company Vonage Holdings Corp. posted a fourth-quarter loss, and that biotech company Biogen Idec Inc.’s fourth-quarter profit came in below analysts’ expectations.

Qualcomm rose $1.59, or 4 percent, to $41.25; Vonage fell 46 cents, or 8 percent, to $5.37, and Biogen fell $2.40, or 4.8 percent, to $48.09.

Wall Street seems to be firmly entrenched in an uptrend, said Chris Hensen, senior portfolio manager of U.S. equities for MFC Global Investment Management in Toronto. He noted that this earnings season, which is nearing its end, appears to be showing double-digit growth for the 14th consecutive quarter but slower than that of last year.

“When earnings growth slows, it’s actually positive for the markets. When you see an acceleration in earnings, the Fed is more proactive,” Hensen said.

Advancing issues outnumbered decliners by about 3 to 2 on the New York Stock Exchange, where volume came to 1.38 billion shares.

The Russell 2000 index of smaller companies was up 1.44, or 0.18 percent, at 815.43.

Overseas, Japan’s Nikkei stock average rose 0.81 percent. Britain’s FTSE 100 was up 0.19 percent, Germany’s DAX index was down 0.04 percent, and France’s CAC-40 was down 0.09 percent.

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