(Updates to close)
* U.S. crude prices up nearly 2 pct, Brent above $40
* Indexes up: Dow 1.3 pct, S&P 1.6 pct, Nasdaq 1.9 pct
By Laila Kearney
March 11 (Reuters) - The Dow and S&P 500 rallied on Friday to their best close of 2016 as investors embraced the European Central Bank's stimulus measures and steadying oil prices drove up energy shares.
Investors shook off skepticism over the ECB's stimulus package disclosed on Thursday, which was overshadowed by signals of an end to rate cuts, said Eric Kuby, chief investment officer at North Star Investment Management Corp in Chicago.
"It seemed to me this is yesterday's rally delayed until today," said Kuby. Investors "reassessed and realized it was good news."
Friday's bullish session was also strengthened by steadying oil prices, which have remained closely correlated with equities throughout the year.
U.S. crude was up almost 2 percent and Brent was above $40 per barrel after the International Energy Agency said oil prices may have bottomed as output in the United States and other non-OPEC countries was beginning to fall quickly. The combined oil and natural gas U.S. rig count fell to its lowest on records going back to 1940, according to data from Baker Hughes.
The Dow Jones industrial average rose 218.18 points, or 1.28 percent, to 17,213.31, the S&P 500 gained 32.62 points, or 1.64 percent, to 2,022.19 and the Nasdaq Composite added 86.31 points, or 1.85 percent, to 4,748.47.
For the week, the Dow rose 1.2 percent, the S&P gained 1.1 percent and the Nasdaq added 0.7 percent, marking the fourth consecutive positive week for the three indexes.
The cost of protection against a decline in the S&P 500, as measured by the CBOE Volatility Index, hit its lowest this year.
The S&P 500 is now down 1.1 percent for the year, staging a sharp recovery from a selloff at the start of the year that was partly driven by a rout in oil.
The largest percentage gainer on the S&P 500 was Devon Energy, which rose 11.4 percent, while the largest decliner was Pepco Holdings, down 9 percent.
Investors now turn their attention to the U.S. Federal Reserve, which is set to meet on March 15-16 to decide on interest rates.
The Fed has said it is on track to raise rates gradually this year, but its decision will hinge on the health of the economy. Recent data has shown the U.S. labor market remains strong but wage growth remains a concern.
Advancing issues outnumbered declining ones on the NYSE by a ratio of more than 5-to-1, and on the Nasdaq the ratio was 3.74-to-1 favoring advancers.
The S&P 500 posted 39 new 52-week highs and one new low; the Nasdaq recorded 69 new highs and 59 new lows.
About 7.5 billion shares changed hands in U.S. exchanges, below the 8.5 billion daily over the last 20 sessions.
Reporting by Laila Kearney