Updated from 4:15 p.m. EST

Stocks closed slightly higher Friday, but next week's Federal Reserve meeting and the prospect of more rate hikes kept buyers from rushing in after positive Google ( GOOG) news and talk of a trans-Atlantic telecom merger.

The Dow Jones Industrial Average ended the session up 9.68 points, or 0.09%, to 11,279.97, and the S&P 500 added 1.28 points, or 0.1%, to 1302.95. The Nasdaq rose 12.67 points, or 0.55%, to 2312.82.

The market rallied in the morning on news from the Commerce Department that new homes sold at an annualized pace of 1.08 million in February, missing the 1.2 million consensus. The soft number briefly soothed interest-rate worries. But, at least for blue chips, buyers grew weary as the session wore on.

Durable-goods orders rose by 2.6% last month, stronger than expected, but the headline number obscured the fact that nondefense capital goods orders excluding aircraft fell by 2.3%, vs. expectations for a 1.0% increase. This component is considered a proxy for business investment.

The 10-year Treasury bond ended the day up 17/32 in price to yield 4.67%, while the dollar slumped against the euro and the yen.

"The market is really fighting right now with whether the Fed has tightened enough," says Brian Wesbury, chief economist with First Trust Advisors. "You get a little weakness in durables and definite weakness in new-home sales, and everyone said the Fed is almost done, but if you really dig in and look, the economy is still in great shape."

A fed funds hike to 4.75% from 4.50% is a foregone conclusion, with the market most interested in the statement that will accompany the announcement. Interest rate watchers will inspect the wording for clues to how much more tightening central bankers believe the economy can handle.

"We've clearly extended the top of the trading range, so we're still in a bull market, even with the pullback," says Wesbury. "We'll see volatility in the weeks to come because worries about the Fed will wax and wane."

Michael Darda, chief economist at MKM Partners, agrees, adding, "There's no fundamental value in bonds ... regardless of what your view on the Fed is.

"If the Fed stops, you should own financials. If the Fed continues to raise rates, then clearly stocks are the place to be because of the valuation disparity. Bonds will get crushed."

But Randall Diamond, head of equity sales and trading at Miller Tabak, disagrees.

"The data does not portend well for housing, which in turn does not portend well for this market," Diamond says. "I would be more cautious right now."

Higher energy prices and bond yields meant pain for stocks on Thursday, with the Dow Jones Industrial Average falling 0.4% to 11,270 and the Nasdaq Composite losing 0.1% to 2300. For the month to date, the Dow is up 2.5%, while the S&P 500 has risen 1.6% and the Nasdaq has gained just under 1%.

Oil climbed again. In Nymex trading, crude for May delivery ended the day up 35 cents to $64.26.

Techs got a lift from the placement of Google into the S&P 500, a move that will require index fund managers to buy the stock. The elevation of Google, whose $101 billion market cap makes it one of the biggest U.S. tech companies, has been rumored for months.

Telecom-equipment suppliers Lucent ( LU) and Alcatel ( ALA) confirmed late Thursday that they are discussing a merger, reprising negotiations that broke off five years ago over the issue of who would acquire whom.

The merger talks extend a wave of consolidation that has swept telecom in recent months, the last example being AT&T's ( T) agreement to acquire BellSouth ( BLS). The latest linkup is being billed as a merger of equals, even though Alcatel's market capitalization is about 40% greater than Lucent's.

Comex gold for April delivery ended the day just off its highs, up $9.70 to $560.50 an ounce, snapping a three-day losing streak.

Higher metals prices across the board lifted Coeur d'Alene Mines ( CDE), which gained 4.8% on the day.

Overseas markets closed mostly higher. London's FTSE 100 ended the day up 0.77% to 6036.30, while Germany's Xetra DAX rose 0.44% to 5973.14. In Asia, Japan's Nikkei added 71.5 points overnight, or 0.43%, to close at 16,560.87, while Hong Kong's Hang Seng eased 54.71, or 0.35% to end the session at 15,716.46.

Market breadth was positive. On the New York Stock Exchange, winners topped losers 5 to 3 on volume of 1.48 billion shares. On the Nasdaq, advancers beat decliners by nearly 2 to 1 on volume of 1.91 billion shares.

Networking-equipment makers rallied Friday, with Nortel ( NT), Tellabs ( TLAB), Ciena ( CIEN) and Avanex ( AVNX) all moving higher.

Symantec ( SYMC) and Applied Materials ( AMAT) also posted gains.

Palm's ( PALM) third-quarter earnings rose sevenfold to $29.9 million, or 28 cents a share, on a 36% jump in revenue. Adjusted earnings of 19 cents a share were 3 cents better than expected.

But all was not perfect in techland. Cephalon ( CEPH) could see pressure after an FDA advisory panel recommended against approval of its Sparlon for attention deficit hyperactivity disorder. Committee members cited concerns about the drug causing a potentially fatal skin disease.

And 3Com ( COMS) said its third-quarter loss narrowed to $32.8 million, or 8 cents a share, from $53 million, or 14 cents a share, a year ago. Sales rose 10% to $177.6 million, about $12 million below estimates.

Wendy's ( WEN) spinoff Tim Hortons ( THI) priced its much-anticipated initial public offering at $23.16 apiece, raising about $672 million. The stock soared during its debut Friday on the NYSE.

Campbell Soup ( CPB) is exploring alternatives for its Irish and U.K. operations, saying the portfolio is "fragmented" and hasn't met growth targets. The businesses generate annual sales of half a billion dollars.

Idenix Pharmaceuticals ( IDIX) plummeted on news that the company lowered dosing levels in an ongoing clinical trial for the hepatitis C treatment valopicitabine due to dose-related gastrointestinal side effects in patients. Idenix said the modifications will delay the drug's development.

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