After a sharply weaker opening, the Dow Jones Industrial Average reversed course and closed up a hefty 121.07 points (1.10 per cent) at 11,143.13.

The tech-heavy Nasdaq lost a modest 3.23 points (0.15 per cent) to 2,183.34 and the broad-market Standard & Poor's 500 index rose 4.09 points (0.34 per cent) to 1,213.27.

Despite the recovery for the day, the main indexes were sharply lower for the week amid anxiety over the financial rescue plan.

The Dow fell 2.18 per cent and the S&P lost 3.33 per cent.

The market focused on wrangling in Washington over the proposed US$700 billion (S$996 billion) plan to help shore up the banking sector drowning in mortgage losses.

Hopes for a deal had faded late Thursday but were revived on Friday as President George W. Bush urged support for the plan.

Analysts at Briefing.com said there was 'no particular news item' that prompted the late-day rally.

But they added that 'the growing consensus is that a federal asset funding plan will be approved.'

'Chances are that Congress will cave in and play along with the Treasury, under the economic and political pressure that something must be done,' Adolfo Laurenti, senior economist at Mesirow Financial, said.

'For all the legitimate doubts that can be expressed on the plan, the fact is that the economic consequences of inaction would be severe.'

Although the stock market was resilient, analysts were concerned about a freezing up of credit markets. With banks unwilling to lend to each other, or demanding high premiums for loans, the impact could be severe on the markets and economy.

The 'spread' for interbank loans compared with short-term Treasury bills hit an all-time high of 3.97 percentage points on Friday, according to Fred Dickson at DA Davidson & Co.

'The action by investors and corporate depositors moving from corporate-issued, short-term financial instruments to Treasury securities is essentially seizing up the capital markets,' said Mr Dickson.

'In simple terms, banks and other financial institutions simply aren't lending to one another. Corporations are having problems getting short-term funds to meet daily operational levels from traditional sources such as the commercial paper market.'

The market appeared to shake off news of the government shutting struggling Washington Mutual, one of the country's largest savings and loans banks, and orchestrating JPMorgan Chase's purchase of its operations for US$1.9 billion. It was the largest bank failure in US history.

'The uncertainty over the fate of Washington Mutual was thankfully resolved overnight with the takeover by JP Morgan,' said Brian Bethune, analyst at Global Insight.

'The takeover was not pretty - with the FDIC (Federal Deposit Insurance Corp) seizing the company prior to the takeover - but at least the job got done and that removes one major source of uncertainty from the markets,' Mr Bethune said.

Among stocks in focus, JPMorgan Chase rose 10.17 per cent to US$47.88 as markets appeared to welcome its takeover of the assets of Washington Mutual, whose shares plunged 90 per cent to 16 cents.

Among others in the financial sector, Bank of America rose 6.78 per cent to US$36.70.

Citigroup rose 3.8 per cent to US$20.15 and Wachovia tumbled 27 per cent to US$10.00 after reports cited possible merger talks between the two ailing banks.

Elsewhere, Research In Motion, the Canadian maker of the BlackBerry device, slid 27 per cent to US$70.76 after reporting a rise in profits to US$495 million, below market expectations.

Bonds gained on investor caution. The yield on the 10-year US Treasury bond eased to 3.827 per cent from 3.862 per cent on Thursday and that on the 30-year bond dipped to 4.357 per cent against 4.414 per cent.

Bond yields and prices move in opposite directions. -- AFP