Wall Street rallies on data, ECB bond-buying program

NEW YORK (Reuters) - Stocks rallied on Thursday on positive economic data and the European Central Bank's agreement to launch a new and potentially unlimited bond-buying program to lower struggling euro zone countries' borrowing costs.

U.S. data showed signs of improvement in the labor market ahead of the all important non-farm payrolls report on Friday and also stronger growth in the services sector.

ECB President Mario Draghi, seeking to back up his July pledge to do whatever it takes to preserve the euro, said the central bank's new plan would address bond market distortions and "unfounded" fears of investors about the survival of the euro.

The program, which Germany's Bundesbank is known to have opposed, would focus on bonds maturing within three years and was strictly within the ECB's mandate. Draghi said only one member of the ECB Governing Council had dissented.

"It's definitely giving more comfort to the market. It was what the market was looking for, and we can see that the yields on Italian, Spanish and Portuguese bonds have already come down," said Rex Macey, CIO of Wilmington Trust Investment Advisors.

Data showed the pace of growth in the massive U.S. services sector rose in August on the back of a rebound in employment and exports, though a measure of new orders declined.

Prior to Draghi's news conference, a separate report showed U.S. private employers added 201,000 jobs in August, easily beating economists' expectations.

Another report showed the number of Americans filing new claims for jobless benefits fell last week to its lowest level in a month, also an upbeat signal for a labor market that has struggled to create enough jobs.

The Dow Jones industrial average <.DJI> gained 174.49 points, or 1.34 percent, to 13,221.97. The Standard & Poor's 500 Index <.SPX> rose 18.63 points, or 1.33 percent, to 1,422.07. The Nasdaq Composite Index <.IXIC> climbed 39.66 points, or 1.29 percent, to 3,108.93.

Earlier, the ECB also announced that it will keep its main interest rate at a record low of 0.75 percent, holding fire after a pick-up in inflation last month offset pressure to breathe life into the flagging euro zone economy by easing borrowing costs.

In company news, Supervalu Inc said it would close about five dozen stores as it works to turn around its grocery business, which lags Kroger Co and Wal-Mart Stores Inc . The stock was up 1.8 percent at $2.32.

Realty Income Corp plans to acquire American Realty Capital Trust Inc for about $1.93 billion as it looks to diversify its portfolio outside of the retail industry. Shares of Realty Income rose 3.3 percent to $43.90 and Capital Trust rose 4.8 percent to $12.53.

(Editing by Dave Zimmerman)