Market rallies on emerging 'fiscal cliff' deal

US stocks jumped after a deal emerged from negotiations in Washington to avert the "fiscal cliff," sources familiar with the talks said.

Equities surged in a thinly traded session, on track to break a five-day streak of losses, as the sources said a majority of Senate Republicans were expected to support the legislation.

The Dow Jones industrial average was up 50.38 points, or 0.39 percent, at 12,988.49 after trimming some of its gains. The Standard & Poor's 500 Index was up 9.73 points, or 0.69 percent, at 1,412.16. The Nasdaq Composite Index was up 31.37 points, or 1.06 percent, at 2,991.68.

The S&P 500 is now up 12.4 percent for the year, compared with a flat performance in 2011. The Dow is about 6.4 percent higher and the Nasdaq is up 15 percent.

The pan-European FTSEurofirst 300 has also gained roughly 13 percent this year, largely due to the European Central Bank's vow to tackle the region's debt crisis, and recovered from an early morning dip to end the year at 1,131.64.

With the world's major central banks expected to keep pumping stimulus into their economies at any sign of weakness, most economists forecast further gains in equities next year.

The benchmark 10-year U.S. Treasury note was down 10/32, with the yield at 1.74 percent, with some traders citing a possible deal on the fiscal cliff as weighing on bonds.

Japan's Nikkei average climbed to a 21-month high on Friday, posting its best yearly gain since 2005, as rising expectations of aggressive monetary stimulus under new Prime Minister Shinzo Abe weakened the yen and bolstered exporters' shares.

Blue-chip exporters Toyota Motor Corp, Honda Motor Co, Canon Inc and Nikon Corp posted gains of 1.1 to 2.3 percent. Index heavyweight and industrial robot maker Fanuc Corp gained 1.2 percent.

The Nikkei advanced 0.7 percent to 10,395.18 on the last trading day of the year, after touching its highest level since March 10, 2011, in intraday trade.