Stock markets closed sharply higher Thursday as good news from U.S. banks raised hopes the financial sector is recovering.

Toronto's S&P/TSX composite index closed up 97.26 points to 9,343.37.

The spring rally on markets, now in its sixth week, has been driven in large part by growing optimism that the financial industry is on the mend.

But analysts caution the sector is far from being out of the woods.

"One shouldn't be too enthusiastic about the reports of the American banks because, after all, they were issued all these buckets of money in the form of TARP, which is now clearly on their conscience and they want to pay it back," said Michael Smedley, executive vice-president and CEO at Morgan Meighen and Associates.

"Perhaps they are in fact, for the longer term, good buys, but they are still vulnerable to the credit squeeze and bad product - but they do look as though they might be turning the corner and are on the road to revival."

The TSX financial sector was up 2.4 per cent as Royal Bank (TSX:RY) gained $1.22 to $42.35 and Manulife Financial (TSX:MFC) advanced 82 cents to $20.04.

In the U.S., JPMorgan Chase said its first-quarter profit fell to US$2.1 billion, or 40 cents per share, from $2.4 billion, or 67 cents per share, a year ago. But the results topped expectations for earnings of 32 cents per share and its shares were up 68 cents to US$33.24.

The positive showing came days after Wells Fargo and Co. and Goldman Sachs Group Inc. also reported profit above analysts' forecasts.

On Wednesday, American Express Co. released data that suggested credit card defaults may be stabilizing. And the chief executive of Alabama's Regions Financial said it would post a first-quarter profit as deposit growth is strong and steady.

New York's Dow Jones industrials advanced 95.81 points to 8,125.43, while the S&P 500 index gained 13.24 points to 865.3.

The Nasdaq composite index rose 43.64 points to 1,670.44 ahead of earnings after the close from Internet giant Google Inc.

The company reported a first quarter net profit of US$1.42 billion, up from US$1.31 billion a year ago. Revenue rose six per cent from the year ago quarter but slipped three per cent from the fourth quarter of last year. Earnings excluding special items came in at US$5.16 a share, 23 cents higher than expectations. Its shares rose five per cent in after hours trading in New York.

Investors also took in news that debt-strapped newsprint giant AbitibiBowater Inc. (TSX:ABH) has filed for bankruptcy protection from creditors in the United States and will seek similar protection in Canada on Friday.

AbitibiBowater said Thursday it had no other options after failing to refinance debts at its Bowater and Abitibi-Consolidated subsidiaries. Its shares have been suspended from trading on the TSX, where they closed Wednesday at 61 cents.

In economic news, Statistics Canada reported that manufacturing sales increased 2.2 per cent to $42.9 billion in February, the first increase since last July.

The TSX Venture Exchange was down 5.81 points to 982.13 while the Canadian dollar lost 0.44 of a cent to 82.67 cents U.S.

Helping temper enthusiasm Thursday was a report that General Growth, the second-largest mall operator in the U.S., has filed for Chapter 11 bankruptcy protection. The company said it was unable to persuade debtholders to give it more time to refinance its debt.

There was also economic data showing further indications that the worst U.S. housing slump in decades has yet to hit bottom.

The U.S. Commerce Department said that construction of new homes and apartments dropped by a worse-than-expected 10.8 per cent last month to a seasonally adjusted annual rate of 510,000 units. That was the second lowest construction pace in records going back 50 years.

The TSX energy sector was ahead two per cent with oil prices on the New York Mercantile Exchange 73 cents higher to US$49.98. Canadian Natural Resources (TSX:CNQ) rose $1.04 to $55.78 and Petro-Canada (TSX:PCA) climbed 68 cents to $37.99.

The June bullion contract moved down $13.70 to US$879.80 an ounce, taking the gold sector down more than five cent. Barrick Gold Corp. (TSX:ABX) declined $2.04 to C$33.93 and Goldcorp Inc. (TSX:G) gave back $2.62 to $34.10.

The chief executive of fertilizer maker Agrium Inc. (TSX:AGU) renewed his plea for takeover target CF Industries Holdings Inc. (NYSE:CF) to consider Agrium's US$3.8-billion offer, inviting the U.S. firm's management to meet and discuss terms. Agrium shares rose 97 cents to $50.47.

Nokia Corp. says its profits plummeted 90 per cent in the first quarter to US$193 million compared to US$1.9 billion in the same period last year.

Sales at the world's top mobile phone maker dropped 27 per cent to US$14.7 billion but results were still better than expected and its shares jumped $1.52 or 11.4 per cent to US$14.88.