NEW YORK (CNN/Money) - A surprisingly strong manufacturing report boosted U.S. stocks Thursday, giving the markets a powerful start to the first trading day of the year.

The Nasdaq composite (up 49.34 to 1384.85, Charts) gained 3.7 percent, the Dow Jones industrial average (up 265.89 to 8607.52, Charts) added 3.2 percent, and the Standard & Poor's 500 index (up 29.21 to 909.03, Charts) rose 3.3 percent, all on broad-based buying.

"We had the good ISM data and the market reacted very positively. The one missing ingredient was the volume," Stephen Porpora, a managing floor broker at William O'Neil & Co., told CNNfn's Street Sweep. "What we're gonna watch closely in the coming day and weeks is if there is a follow-through on volume. Major institutions drive this market and volume is an indication of that."

On the New York Stock Exchange, winners topped losers 5 to 2 as 1.21 billion shares changed hands. On the Nasdaq, advancers beat decliners by more than 11 to 5 as 1.26 billion shares traded.

The December ISM index, a reading on manufacturing, showed a surprisingly large jump to 54.7 from 49.2 in November, when economists were expecting a rise to only 50.1. It marked the first time the sector has shown growth since August; a reading above 50 is considered a sign of expansion in the sector.

"It's all the ISM number. We started the morning where it seemed like no one was gonna invest, and then all of a sudden, the number comes out and the buyers are back. It's kind of a big surprise," said Brian Finnerty, managing director at Melhado Flynn & Associates.

In corporate news, shares of Dow component J.P. Morgan Chase (JPM: up $1.44 to $25.44, Research, Estimates) rallied sharply after the firm said it settled a dispute with 11 insurers to cover approximately $1 billion of losses resulting from deals with bankrupt energy trader Enron. Trading in the stock was delayed at the market's open, pending news.

Shares of Dow component Merck (MRK: up $1.64 to $58.25, Research, Estimates) rose after the Food and Drug Administration approved its hay fever drug, while shares of Walt Disney (DIS: up $0.95 to $17.26, Research, Estimates), also a Dow-30 stock, gained on a Sanford Bernstein upgrade to "outperform."

Of the 30 blue-chip issues that comprise the Dow industrials, 29 closed the session higher.

Networking, wireless and semiconductor stocks led the tech-heavy Nasdaq higher, with heavily-weighted names including Cisco Systems (CSCO: up $0.54 to $13.64, Research, Estimates), Intel (INTC: up $1.12 to $16.69, Research, Estimates), Applied Materials (AMAT: up $0.95 to $13.98, Research, Estimates), Sun Microsystems (SUNW: up $0.27 to $3.38, Research, Estimates), and Oracle (ORCL: up $0.41 to $11.21, Research, Estimates) rallying.

Despite the strong start, analysts expressed skepticism about the durability of the session's rally, although a long-lasting change in tone would certainly be welcome. Stocks fell in 2002 for the third year in a row, the first time since the period of 1939-1941, amid World War II.

But whether any early gains are a harbinger of the year's stock activity is unclear as investors continue to digest the same challenges that pressured stocks last year: worries about terrorism and the potential for war with Iraq, rising oil prices, corporate scandals and a sluggish economy.

"I would still call it a trading-range market," Melhado Flynn's Finnerty added. "It's nice for today and the short term, but I doubt it's sustainable."

In international markets, Asian stocks started the new year higher, although Tokyo remains closed for another session. In Europe, stocks closed higher on gains in oil.

Treasury prices fell sharply, pushing the yield on the 10-year note up to 4.04 percent from 3.81 percent late Tuesday. Bond prices and yields move in opposite directions.

The dollar rose sharply against the euro and the Japanese yen. Gold prices edged lower. Light crude oil rose 65 cents to $31.85 a barrel in New York.