NEW YORK (CNN/Money) - U.S. stocks rallied Thursday as some positive economic news and a drop in the terrorist threat level heightened investors' hopes, but the Dow would need to post fairly hefty gains Friday to end the week, and the month, higher.

The tech-laden Nasdaq composite (up 20.26 to 1323.94, Charts) registered the greatest gain Thursday, at 1.6 percent. The S&P 500 index (up 9.73 to 837.28, Charts) rose 1.2 percent and the Dow Jones industrial average (up 78.01 to 7884.99, Charts) charted a 1 percent gain. The broad market has see-sawed throughout the week, with stocks rising Tuesday and Thursday, but falling Monday and Wednesday.

"We're trying to go the distance for a change, but we're basically hostage to these geopolitical events," said Donald Selkin, director of research at Joseph Stevens. "We're not going to sustain anything consistently on the upside until we get a resolution to this thing."

The Dow and S&P would have to make significant gains Friday to close out the week, and the month, on an up note. The Dow has fallen about 169 points so far in February, with more than 133 of those points lost this week. The S&P has logged about 11 points in losses so far this week and 19 points for the month.

Meanwhile, the Nasdaq needs to rise more than 25 points to close the week higher, but it's up slightly thus far on the month. If stocks can't manage the gains, February will be the third straight down month for the major indexes.

But, after some volatility during the day, first after a weak report on new home sales and later on more uncertainty about the Iraq situation, stocks fought to finish in the green Thursday.

The Commerce Department said durable goods orders rose 3.3 percent in January compared with a 0.2 percent decline in December. Economists had expected a climb of 1 percent. There was good news in the core of the report, too. New orders for nondefense capital goods excluding aircraft -- a measure that economists track closely to see whether companies are boosting spending on new equipment -- grew by 5.4 percent.

And, traders said, a relaxed terror threat alert also helped the broad market move higher.

Government officials lowered the terrorist threat level back down to "elevated" (or yellow) from "high" (or orange) just before noon Thursday, giving investors some respite from heightened fears of an attack. The level had been raised in recent weeks after the government said it had received an increased amount of threats against Americans.

In addition to the possibility of more war talk, investors will have a few key economic reports and some earnings to consider Friday.

Before the opening bell, the government plans to report a preliminary reading on gross domestic product for the fourth quarter. Economists surveyed by Briefing.com have a consensue forecast of 1 percent growth, up from an initial fourth-quarter reading of 0.7 growth.

Just after trading begins, investors will get a revised report on the University of Michigan consumer sentiment index for February, which Wall Street expects to fall in line with the preliminary reading of 79.2.

But the Chicago Purchasing Managers Index might cast a negative tone. Economists expect it fell to 52.5 in February from 56 in January. The report is scheduled for shortly after the markets open.

After the close of trading Thursday, clothing retailer Gap (GPS: up $0.06 to $14.82, Research, Estimates) posted a fourth-quarter profit of 27 cents per diluted share, reversing a year-ago loss and coming in line with analysts' average expectation, according to First Call.

Wall Street kept the thought of war in the back of its mind, as the price of oil continued to rise and the rhetoric, both for and against armed conflict with Iraq, kept its torrid pace of recent weeks on both sides of the Atlantic.

The BBC reported that U.N. Chief Weapons Inspector Hans Blix plans to conclude that inspections aimed at disarming Iraq have had very limited results when he reports to the U.N. Security Council Saturday, according to a draft of Blix's report obtained by the BBC. The report also says that Iraq has not begun destroying its Al-Samoud-II missiles, but quotes Iraqi officials saying they plan to respond to the demand by Saturday, the BBC report said.

Meanwhile, the Security Council met behind closed doors Thursday to discuss a resolution proposed by the United States that would open the door for a military attack on Iraq. (Go to CNN.com for the latest news.)

On the opposite side of the globe, in a sign that it is proceeding with its nuclear arms program, North Korea restarted a five-megawatt nuclear reactor, U.S. officials said, and ordered its citizens to prepare for a large-scale attack by the United States.

Oil slipped a bit after rallying to heights not seen since the 1991 Gulf war. Light crude futures for April delivery briefly hit $39.99 a barrel, but closed down 50 cents at $37.20.

"The market is definitely oversold, with people sitting on the sidelines," said Hedi Reynolds, head of Nasdaq trading at Morgan Keegan. "When durable goods came out, we saw a lift, but people are still sitting on their hands. It's looking better, but we're still in the mode of 'wait and see.'"

The durable goods report overshadowed the day's dose of otherwise negative economic news.

First, the government said the weekly jobless claims number jumped 11,000 to 417,000 in the week ended Feb. 22. Economists had forecast a drop to 390,000.

Then, the Commerce Department came out with a report that sales of new homes plunged 15.1 percent in January, causing markets to sell off briefly. The housing market has been one of the few remaining strongholds of the ailing U.S. economy.

The breadth of the stock market was positive. On the New York Stock Exchange, gainers outnumbered losers 2 to 1 on volume of 1.3 billion shares. On the Nasdaq, rising stocks held an advantage over decliners by a 3 to 2 margin as 1.2 billion shares changed hands.

U.S. Treasury bonds were mixed, with the yield on the benchmark 10-year note holding at 3.75 percent. The dollar rose against both the yen and the euro.

Gold fell $7.90 to $346.20 an ounce in New York.

Stocks in Europe ended mostly higher and Asian-Pacific markets finished slightly positive on light volume. South Korea's Kospi flipped lower as Seoul traders continued to fret about North Korea's missile test earlier in the week.