Updated from 4:09 p.m.

Stocks ended the month with a bang as optimism grew that the economy might be about to turn the corner.

The Dow Jones Industrial Average jumped 139 points, or 1.6%, to 8850.26. The Nasdaq rose almost 21 points, or 1.3%, to 1595.91 and the S&P 500 climbed almost 14 points, or 1.5%, to 963.59. For the month, the Dow added over 4%, the Nasdaq gained almost 9% and the S&P climbed 5%.

Treasuries fell, with the yield on the 10-year note at 3.36%. Crude oil prices were sharply higher at $26.35 in London. The dollar was weaker against the euro, but slightly stronger against the yen.

The Dow reached its highest level since early December of last year, while the Nasdaq broke above the peak reached on June 5, 2002. The S&P also closed at an 11-month high. This was the fourth straight monthly rise for the Nasdaq, the longest string since 1999, while the S&P had its third consecutive month of gains.

But some still voiced skepticism. "There is life in the economy yet, but we still have a challenging environment, employment data is still poor," said Ron Hill, market strategist at Brown Brothers Harriman & Co. "Either people really confident or they are chasing the biggest bang for the buck. If those fundamentals don't come around, can this really lead you on a sustained rally?"

Despite it being a Friday, investors actively participated in the market once again, with volume totaling 1.7 billion on the New York Stock Exchange, and advancers were ahead of decliners by more than 3 to 1. At the Nasdaq, 2.2 billion shares traded hands, while market breadth topped the 2-to-1 margin.

"They liked today's economic numbers a lot. The improvement in the equities market is an indication of growing confidence the economy will come out of the doldrums," said Lyle Gramely, senior economic advisor at Schwab Capital Markets. "But whether this is enough of a motivating factor, it's hard to say."

An improving manufacturing picture was helped buoy the market. The Chicago Purchasing Management Index unexpectedly rose to 52.2 in April. Any number above 50 indicates business is improving.

Investors also got the University of Michigan's April revision of its consumer confidence index, which showed buyers were more optimistic in May than in April. The figure rose to 92.1, from 86 in April, but was still below expectations of a 93 reading.

Personal spending unexpectedly fell 0.1% in April, compared to a gain of 0.8% the previous month, while personal income was unchanged from a 0.4% rise in March, the Commerce Department said.

"The data was mildly encouraging and could indicate we're off to the races," said Gramely at Schwab Capital Markets. "But it's still too early to jump to that conclusion. I'd like to see more hard evidence the economy is really coming out of the doldrums."

To top off the good mood, markets got news of the U.S. terror alert being lowered to yellow, or elevated, from orange.

Leading the big caps, software maker Microsoft ( MSFT) said Thursday after the close that it would pay $750 million to media giant AOL Time Warner ( AOL) to settle a long-running antitrust dispute. Both agreed to work together on Internet-based media and technology. AOL rose 37 cents, or 2.5%, to $15.22 and Microsoft gained 21 cents, or 0.9%, to $24.61.

Schering-Plough ( SGP) said one of its units is being investigated for allegedly selling misbranded and unapproved drugs, as well as providing fake drug prices to the government and obstructing justice. Shares shed 45 cents, or 2.4%, to $18.45.

Among analyst actions, Citigroup ( C) shares closed 25 cents higher, or 0.6%, at $41.02, despite a downgrade at USB Piper Jaffray. Analysts lowered the rating to outperform from strong buy, citing valuation concerns and a possibly adverse banking environment going forward.

The U.S. Navy will pay as much as $2 billion to Boeing ( BA) and Northrop Grumman ( NOC) to jointly design and build its next generation of radar-jamming airplanes. Boeing shares added 72 cents, or 2.4%, to $30.67, while Northrop Grumman shares gained $1.54, or 1.8%, to $87.70.

ImClone ( IMCLE) shares rose $5.04, or 21.5%, to $28.50 amid expectations that data to be presented at the American Society of Clinical Oncology meeting this weekend could confirm that the biotech company's Erbitux drug is effective on cancer patients, The Wall Street Journal reported.

Home Depot ( HD) said it will buy back as much as $500 million in shares and use $4 billion to open new stores and renovate old ones. Shares moved up 93 cents, or 3%, to $32.49.

"Strong housing sales data bodes well for the home improvement retailer and recent changes in store design will help increase customer traffic flows," said Robert Pavlik, a portfolio manager with Oaktree Asset Management, whose current positions include Home Depot.

3Com ( COMS) said fourth-quarter sales will be significantly lower than it had initially predicted due to tough competition and weaker demand in international markets. The maker of computer-networking equipment fell 59 cents, or almost 11%, to $4.91.

McData ( MCDT), which makes network storage switches, posted its third consecutive quarterly profit and said earnings in the current quarter will beat analysts' estimates. Shares climbed $2.39, or 21.6%, to $13.47.

Overseas markets were mixed, with London's FTSE 100 down 0.9% at 4048 and Germany's Xetra DAX up 2.5% at 2978. In Asia, Japan's Nikkei closed 0.6% higher at 8424, while Hong Kong's Hang Seng lost 0.2% to 9487.

On Thursday, the Dow closed down 82 points, or 0.9%, at 8711. The S&P 500 fell 4 points, or 0.4%, to almost 950, while the Nasdaq rose 12 points, or 0.8%, to 1575.