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NEW YORK (CNNMoney.com) -- Stocks rallied Friday afternoon, gaining for a second session, as investors welcomed Microsoft's bid for Yahoo and more talk of a bailout for the troubled bond insurer sector.

The positive news helped temper worries about a recession following a surprisingly weak January jobs report.

According to early tallies, the Dow Jones industrial average (INDU) gained 0.7%, the broader Standard & Poor's 500 (SPX) index added 1.2% and the Nasdaq composite (COMP) added 1%.

All three major stock gauges rose on the week as well. For the Dow and S&P 500 it was the second week in a row this year for posting weekly gains, while for the Nasdaq, it was the first week this year that the average posted a weekly gain.

All three major gauges posted gains of about 1% in the early going, dipped into negative territory by mid-morning and then rebounded a bit in the afternoon.

Microsoft made an unsolicited $44.6 billion cash and stock bid for Yahoo Friday. The offer of $31 a share represents a 62% premium over Yahoo's closing price Thursday.

Yahoo (YHOO, Fortune 500) shares shot up 48%, while Microsoft (MSFT, Fortune 500) shares fell nearly 7%.

Investors cheered the deal news early on, but a weak January jobs report reignited recession fears. Such fears sent stocks tumbling in January, although recent Federal Reserve and Federal government action has helped temper recession fears and give stocks some support.

"Potentially we're in a bottoming process, but there are numerous issues out there that could send us back down to the lows or cause us to establish new lows," said Timothy Ghriskey, chief investment officer at Solaris Asset Management.

In particular, Wall Street is keeping an eye on the bond insurers, such as leaders Ambac Financial (ABK) and MBIA (MBI).

Credit crisis continues. Wall Street rallied Thursday, ending a miserable January on a high note, after comments from MBIA helped temper worries that a meltdown in that sector was the next leg of the credit market fallout.

The sector remained in focus Friday after Moody's Investor Service said it expects to downgrade some bond insurers later this month. That was countered by reports that progress is being made on plans to bail out the troubled sector.

Lowering an insurer's rating makes it harder for the company to get new business, potentially weakens the value of hundreds of billions of dollars in bonds and could mean another big wave of writedowns for the already shaky financial sector.

Economic news. Employers cut jobs from their payrolls in January, the government reported Friday morning, surprising economists who were expecting a gain of 70,000 jobs. It was the first drop in employment in four years. On the upside, the previous month's anemic rise in employment was revised higher. (Full story).

Other economic readings came in mixed. Construction spending dropped 1.1%. The January consumer sentiment index from the University of Michigan was revised down to 78.4 from an initial 79.

On the upside, the Jan. ISM manufacturing index climbed more than expected, rising to 50.7 in the month from 47.7 in the previous month.

Company news. On the earnings front, Exxon Mobil (XOM, Fortune 500) reported the highest quarterly and annual profit ever, helped by surging oil prices. (Full story).

Late Thursday, Google (GOOG, Fortune 500) reported higher quarterly sales and earnings that were short of analysts forecasts, sending shares 7% lower Friday.

Motorola (MOT, Fortune 500) said late Thursday that it is considering spinning off its mobile unit. Shares jumped over 9% Friday in active New York Stock Exchange trading.

Intel and Micron Technology introduced a new high-speed memory chip Friday, that they said was five times faster than what is currently used in data transfer for computing, video and photography. Intel (INTC, Fortune 500) rose 3% while Micron (MU, Fortune 500) rose 11%.

In other chip sector news, the Semiconductor Industry Association said Friday that global chip sales rose in December, the fourth quarter and 2007, despite a slowdown in memory chip sales.

The stock advance was broad based, with 22 out of 30 Dow stocks rising, led by Citigroup (C, Fortune 500) and Alcoa (AA, Fortune 500).

Small-cap stocks surged too, with the Russell 2000 (RUT.X) index adding 2.4%.

Market breadth was positive. On the New York Stock Exchange, winners topped losers by over 3 to 1 on volume of 1.79 billion shares. On the Nasdaq, advancers beat decliners by over 2 to 1 on volume of 3.21 billion shares.

Recession fears remain. Fears of a recession amid the credit and housing market sent stocks tumbling in January, with the Nasdaq losing almost 10%, its worst Jan. performance since its inception in 1971.

Earlier this week, the Federal Reserve cut interest rates for the second time in just over a week, as an attempt to help stabilize the economy and keep money flowing through the system.

"The Fed action is likely to help the economy stay out of recession, or pull out of recessionary conditions quickly," said Ghriskey. "But the credit issues remain an overhang."

Other markets. Treasury prices gave up gains, with the yield on the 10-year note standing at 3.59%, little changed from where it stood late Thursday. Bond prices and yields move in opposite directions.

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

U.S. light crude oil for March delivery fell $2.79 to settle at $88.96 a barrel on the New York Mercantile Exchange.

COMEX gold for April delivery fell $14.50 to $913.50 an ounce.