Blue-Chip stocks gained yesterday, but finished well below session highs after a key index of manufacturing activity posted its largest gain in five years, fanning hopes that the sector may be pulling out of a more than year-long recession. But technology shares fell, lead by software and semiconductor names.

Guiding the market in the first trading day of September was an important measure of US manufacturing that showed its strongest gain in five years last month as new orders and factory production both rose, suggesting the ailing sector may be recovering from a yearlong slump. The National Association of Purchasing Management's index rose to 47.9 in August from 43.6 in July, above economists' expected 43.9 reading.

"The NAPM shows the economy isn't getting any worse and that was the key people were looking for," said Mr Larry Rice, chief investment officer at Josephthal & Co.

"But I think we're a couple of quarters away from meaningful rebound in Nasdaq."