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 Speculation that Lehman Brothers Holdings Inc. could be sold helped buoy the financial sector and the overall market. Analysts warned this week that the investment bank could book large write-downs for bad debt. But reports Friday that Korea Development Bank is considering buying the company sent investors rushing for the stock. Lehman rose 69 cents, or 5 percent, to $14.41 but finished well off its highs of the session.
Investors also appeared cheered by an inflation forecast from Bernanke who said at the Kansas City Fed's annual economic symposium that inflation pressures should moderate this year amid tepid economic growth. But he also added that the inflation forecast remains "highly uncertain."
John Massey, senior portfolio manager at AIG SunAmerica Asset Management, said investors are encouraged by Bernanke's comments on interest rates and by the possibility of a buyer for Lehman.
"We're seeing the potential for maybe another white knight," he said, referring to prospects of a deal to acquire all or part of the investment bank.
The health of the financial sector and rising inflation are two of the market's greatest concerns. Although Bernanke refrained from making predictions about inflation, the market was mollified when light, sweet crude plunged $6.59 to settle at $114.59 a barrel on the New York Mercantile Exchange, after surging by more than $5 a barrel on Thursday.
The Dow rose 197.85, or 1.73 percent, to 11,628.06, near its highs of the session.
Broader stock indicators also rose. The Standard & Poor's 500 index rose 14.48, or 1.13 percent, to 1,292.20, and the Nasdaq composite index rose 34.33, or 1.44 percent, to 2,414.71.
The run-up Friday left stocks with mostly modest losses for the week that again saw a series of triple-digit moves in the Dow. The Dow is down 0.27 percent, the S&P 500 is off 0.46 percent and the technology-heavy Nasdaq is down 1.54 percent.
Bond prices pulled back as investors rushed from the safety of government debt to stocks. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.87 percent from 3.83 percent late Wednesday.
The dollar rose against other major currencies, while gold prices fell.
Massey cautioned against making too much of the market's moves given the light volume this week. With traders squeezing in late-summer vacations, Wall Street has shown erratic trading. The Dow industrials lost more than 300 points over Monday and Tuesday before ending moderately higher Wednesday and finishing mixed Thursday.
"The light volumes are really sort of the reasons behind why you've got some outsize moves. I think the issues over all for the economy and the market are fairly well understood," he said. "The market is of this mind-set that we're going to continue to be flattish to down."
He doesn't expect the stock market to more accurately reflect investor sentiment until after Labor Day, when trading volumes should pick up. Until then, he'll be looking next week at readings on consumer confidence and unemployment to determine where the economy might be headed.
Remarks Friday from Bernanke and investor Warren Buffett appeared to dim Wall Street's hopes that mortgage financiers Fannie Mae and Freddie Mac might be able to get by without a government bailout. While such a move could help prop up the government-chartered companies, which together hold or back nearly half the nation's mortgage debt, it could also wipe out shareholder equity.
While Bernanke didn't mention them by name he said he said one of the critical questions facing the country is how to strengthen the financial system and guard against the "moral hazard" of companies making risky choices thinking that the government will ultimately offer a safety net.
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 Buffett said on CNBC that Fannie and Freddie are too big to fail but that shareholder equity in those companies can be lost.
Fannie Mae rose 15 cents to $5, while Freddie Mac fell 35 cents, or 11 percent, to $2.81.
Linda Duessel, the equity market strategist at Federated Investors, said the financial sector is key to a broader recovery on in stocks, which are down more than 10 percent this year.
"We need to absolutely find a bottom in financials to really believe that the bear can be behind us," she said, referring to the pullback in stocks since last fall.
While most sectors gained ground Friday, some materials companies pulled back as commodity prices fell. United States Steel Corp. fell $5.44, or 3.9 percent, to $133.76, while miner Freeport-McMoRan Copper & Gold Inc. declined $3.06, or 3.3 percent, to $90.60.
In corporate news, Gap Inc. rose 87 cents, or 4.6 percent, to $19.88 after reporting late Thursday that profits in the most recent quarter rose 51 percent from a year earlier, thanks to tight inventory and cost control.
King Pharmaceuticals Inc. said it is prepared to take its bid for Alpharma Inc. directly to shareholders after the company rejected King's $1.4 billion buyout overture. King disclosed the $33 a share offer publicly for the first time Friday. Alpharma surged $10.47, or 44 percent, to $34.51, while King rose 95 cents, or 8.5 percent, to $12.19.
Advancing issues outnumbered decliners by about 3 to 1 on the New York Stock Exchange, where consolidated volume came to a light 3.62 billion shares compared with 3.94 billion shares traded Thursday.
The Russell 2000 index of smaller companies rose 12.35, or 1.70 percent, to 737.60.
Overseas, Japan's Nikkei stock average fell 0.68 percent. Britain's FTSE 100 rose 2.52 percent, Germany's DAX index rose 1.69 percent, and France's CAC-40 advanced 2.23 percent.
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The Dow Jones industrial average ended the week down 31.84, 0.27 percent, at 11,628.06. The Standard & Poor's 500 index finished down 6.00, or 0.46 percent, at 1,292.20. The Nasdaq composite index ended the week down 37.81, or 1.54 percent, at 2,414.71.
The Russell 2000 index finished the week down 15.77, or 2.09 percent, at 737.60.
The Dow Jones Wilshire 5000 Composite Index - a free-float weighted index that measures 5,000 U.S. based companies
- ended Friday at 13,185.26, down 86.62 points, or 0.65 percent, for the week. A year ago, the index was at 14,896.21.
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On the Net:
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
[Associated Press; By TIM PARADIS]
Copyright 2008 The Associated Press. All rights reserved. This
material may not be published, broadcast, rewritten or
redistributed.
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