Stocks rally back on Ambac

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NEW YORK (CNNMoney.com) -- Stocks staged an impressive comeback Friday, with the Dow surging more than 200 points late in the session, after a report said that troubled bond insurer Ambac Financial could see a bailout as soon as next week.

The Dow Jones industrial average (INDU) ended 0.8% higher, ending around 225 points off its lows hit in the last hour of the session.

The broader Standard & Poor's 500 (SPX) index also ended with gains of 0.8%, erasing its losses. The Nasdaq composite (COMP) added 0.2% after having fallen into bear market territory during the session, defined as a drop of at least 20% off the recent highs.

Stocks tumbled Thursday after a weak regional manufacturing report revived bets of a recession. Stocks tumbled for most of Friday as well on downgrades of Fannie Mae (FNM) and Freddie Mac (FRE, Fortune 500) and a big selloff in the financial sector.

But the market staged an abrupt turnaround in the late afternoon after a CNBC report said that a consortium of banks could announce a plan to bail out troubled bond insurer Ambac Financial (ABK) as soon as Monday or Tuesday of next week.

That sent Ambac shares up 16% and enabled competitor MBIA (MBIA) to erase its losses and turn higher. MBIA had fallen during the session one day after it dropped out of a trade group it had been a member of for 22 years.

Hopes of a swift bailout "probably shook off fears of deeper problems in the credit markets," said Donald Selkin, director of research at Joseph Stevens.

Bond insurers have been the most recent thorn in the market's side, amid worries that if they can't raise enough capital, they'll lose their financial strength rating. Without that rating, it becomes harder for the companies to garner new business and means that the big banks will likely have to take larger writedowns.

"Ambac is facing billions of dollars in losses and I guess if there's a rescue plan, the bet is that the losses won't be so terrible," Selkin said.

The Ambac talk lifted financials including Goldman Sachs (GS, Fortune 500), Merrill Lynch (MER, Fortune 500), JP Morgan (JPM, Fortune 500) and Bank of America (BAC, Fortune 500).

Selkin said that stock action next week will probably be determined by whether the Ambac news gets confirmed or not. If not, look for more stock declines, and swiftly.

Market breadth turned mixed after having been negative through most of the session. On the New York Stock Exchange, winners beat losers 3 to 2 on volume of 1.42 billion shares. On the Nasdaq, decliners still topped advancers by about 8 to 7 on volume of 2.31 billion shares.

Genentech, Bernanke and the week ahead. After the close, Genentech (DNA) said that the U.S. Food and Drug Administration approved the drugmaker's Avastin for the treatment of breast cancer. Shares jumped 9% in extended-hours trading and are likely to be active next week. (Full story).

Next week also brings a big slate of economic reports, including readings on new and existing home sales, producer prices, durable goods orders, consumer confidence and personal income and spending.

Investors will continue to scour these reports for more hints about the economic outlook.

"It appears now that we have a real threat of inflation, in addition to the slowing economy, and the subprime issue is still there," said Dean Barber, president at Barber Financial Group.

He said that with all of these issues going on, there remains a lot of uncertainty and reluctance in the market.

Investors next week will also hear from a number of Fed officials, including Chairman Ben Bernanke, who is giving his semi-annual monetary policy testimony before Congress on Wednesday and Thursday.

Other markets. U.S. light crude oil for April delivery rose 58 cents to settle at $98.81 a barrel on the New York Mercantile Exchange.

The March crude futures contract settled at an all-time high of $100.74 a barrel Wednesday after touching a trading high of $101.32.

COMEX gold for April delivery fell $1.40 to settle at $947.80 an ounce.

Treasury prices slipped, raising the yield on the benchmark 10-year note to 3.80% from 3.77% late Thursday. Bond prices and yields move in opposite directions.

In currency trading, the dollar fell versus the euro and the yen.