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The early fourth-quarter results will set the tone. Any weakness will give traders a reason to pull back from the rally of recent weeks, which stalled on Friday on bank stock losses and lackluster jobs data.

Still, the major indexes finished with a sixth straight week of gains: the Dow was up 0.8 percent, the S&P 500 up 1.1 percent and the Nasdaq composite index ahead 1.9 percent.

Alcoa Inc (AA.N) is set to release results on Monday after the market's close, unofficially launching the quarterly earnings season. Intel Corp (INTC.O) and JPMorgan Chase & Co (JPM.N), also Dow components, will likewise issue their report cards in the week and are expected to do well.

"It will be important to get out of the box with a positive note," said James Dunigan, who helps manage $105 billion at PNC Wealth Management in Philadelphia. "If that's the case, we have a little way to run and can keep rising, but if the results disappoint there will be reason to step back."

The S&P 500 .SPX has climbed 7 percent since the start of December while Alcoa has soared 25 percent and JPMorgan has surged 16 percent. Analysts say that such rapid gains leave the market more vulnerable for a pullback and could limit upside potential.

GOOD, BAD AND UGLY

The S&P 500 has struggled to break above 1,280, though a floor appeared to be developing around 1,260, the 14-day moving average and near the 2010 close.

Jeffrey Friedman, senior market strategist at Lind-Waldock in Chicago, said that if results come in line or miss expectations "we could see as much as an 8 percent pullback." Upside potential is 4 percent to 5 percent "and that's only if earnings beat convincingly," he said.

Friday's December employment report could increase the likelihood of stocks' retreating. While the unemployment rate dropped by a hefty amount in December, far fewer workers were added than expected.

"There's good, bad and ugly in that report," Friedman said. "The good was the unemployment rate, the bad was that we didn't meet expectations, and the ugly is that we don't know whether the good or bad is more right."

Next week will also see retail sales data on Friday, which will be closely watched following soft December comparable sales. On Wednesday the Federal Reserve will release the Beige Book.

The Beige Book, an anecdotal report on the economy by region, comes after Chairman Ben Bernanke gave his first congressional testimony since launching a second round of quantitative easing. Bernanke said that the economy may finally be hitting its stride even if growth remains too weak to put a real dent in the U.S. unemployment situation.

Bank stocks could be pressured further next week after a ruling by Massachusetts' highest court that invalidated the seizures of two homes in foreclosure by Wells Fargo & Co (WFC.N) and US Bancorp (USB.N).

The KBW Banks index .BKX is up 18 percent since the start of December but fell 0.9 percent on Friday.

The ruling could impact bank foreclosures nationwide and "dampen recovery prospects for the real estate sector and banks," said Nick Kalivas, senior equity index analyst at MF Global in Chicago. "Financials have really been a leader in the market in recent weeks; this could close that sector out."

(Wall St Week Ahead column appears every Friday and Sunday)

Even with the decline, however, the S&P 500 and Dow recorded their sixth straight week of advances. The market has proved resilient despite expectations that stocks were due for a pullback.

Wells Fargo & Co (WFC.N) and US Bancorp (USB.N) lost a ruling by Massachusetts' top court, which said the banks failed to show they held the mortgages at the time they foreclosed.

The court decision is the latest on the validity of foreclosures conducted without full documentation, and the ongoing mortgage fiasco could prove costly for the banks. The news turned the market lower but some said the reaction was overdone.

"Financials have really been a leader in the market in recent weeks -- this could close that sector out," said Nick Kalivas, senior equity index analyst at MF Global in Chicago.

Wells Fargo shares gave up 2 percent at $31.50 and US Bancorp eased 0.8 percent to $25.09. The KBW Bank index .BKX lost 0.9 percent.

The S&P financial index .GSPF rallied more than 10 percent in December as investors searched for bargains at the end of the year.

On Friday the Dow Jones industrial average .DJI slipped 22.55 points, or 0.19 percent, to 11,674.76. The Standard & Poor's 500 Index .SPX was off 2.35 points, or 0.18 percent, to 1,271.50. The Nasdaq Composite Index .IXIC declined 6.72 points, or 0.25 percent, to 2,703.17.

For the week, the S&P 500 rose 1.1 percent, the Dow gained 0.8 percent and the Nasdaq climbed 1.9 percent.

Investors treaded lightly after the employment report, which showed non-farm payrolls rose a less-than-expected 103,000. But overall employment for October and November was revised upward to show 70,000 more job gains than previously reported.

The Labor Department report showed a surprisingly large number of people gave up searching for work, tempering the positive news of a big drop in the unemployment rate.

Analysts said that while the data showed steady, if slow, progress, it did not meet expectations that had risen through the week.

The mortgage issue has been overhanging banks, prompting an uproar last year that led lenders such as Bank of America Corp (BAC.N), JPMorgan Chase & Co (JPM.N) and Ally Financial Inc to temporarily stop seizing homes.

On the upside, the energy sector capped declines as Diamond Offshore (DO.N) rose 4.9 percent to $70.57 after Goldman Sachs upgraded the driller. Goldman also upgraded Baker Hughes Inc (BHI.N) , sending its shares up 3.2 percent at $56.60.

The S&P 500 found support at its 14-day moving average, which is around 1,262. The index briefly broke below that before popping back up.

The disappointing jobs growth figure reported by the Labor Department on Friday suggested the Federal Reserve would likely stay the course with its effort to support the world's biggest economy with the purchase of $600 billion in government bonds.

The department's survey of nonfarm employers showed payrolls increased 103,000 last month, below economists' expectations for 175,000. Private hiring rose 113,000, while government employment fell 10,000.

"What we are seeing is a pace of hiring that is enough to keep us on track, where we stand, which has been a moderate recovery, but not really enough to point to an acceleration from here," said Julia Coronado, a senior economist at BNP Paribas in New York.

Disappointment over the employment gains and a court ruling in a key foreclosure case resulted in a marginal drop in U.S. stock indexes, while prices of safe-haven U.S. government debt rose. The dollar advanced against a basket of currencies.

Softening the blow, overall employment for October and November was revised to show 70,000 more job gains than previously reported. An independent survey this week had led investors to anticipate sturdy payroll gains in December.

The unemployment rate fell to 9.4 percent, the lowest since May 2009 and down from 9.8 percent in November. It was the biggest monthly drop in the rate since April 1998.

But the survey of households from which the unemployment rate is derived showed the big drop was due to both an increase in employment and a sharp decline in the labor force.

"The Fed will not take much comfort in the decline in the unemployment rate when it is not driven by job growth," said Coronado.

BERNANKE MORE OPTIMISTIC

The slow labor market recovery, which is in stark contrast with other sectors of the economy, is unwelcome news for President Barack Obama, whose administration has struggled to boost employment. High joblessness cost his Democratic Party control of the U.S. House of Representatives.

Announcing a new economic adviser, Obama said the trend for job growth was up, but added that more needed to be done.

"We've got a big hole that we're digging ourselves out of. And so our mission has to be to accelerate hiring and to accelerate growth," he said.

Fairly upbeat data on consumer spending, trade and manufacturing have pointed to a strengthening in the economy and Fed Chairman Ben Bernanke struck a slightly more optimistic tone when he appeared before lawmakers on Friday.

"We have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold," Bernanke told the Senate Budget Committee.

Offering no real clues on the future direction of monetary policy, Bernanke sounded cautiously more upbeat than he had in his most recent public remarks. He cited improvements in consumer spending and a drop in jobless benefit claims as hopeful signs a languid recovery was perking up.

"We have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold," the central bank chief said in his first testimony to Congress since the Fed launched a controversial plan to buy an extra $600 billion in government bonds.

Just a month ago, in an interview on the CBS program "60 Minutes," Bernanke voiced a degree of trepidation about the economy's rebound.

His remarks on Friday were made public just an hour after the government reported the economy generated a disappointing 103,000 jobs in December.

Bernanke, who said it would take four to five years for the labor market to get back to normal, showed no inclination toward cutting short the Fed's bond purchase program, designed to stimulate the economy. But he also offered no hints of further buying beyond the program's June deadline.

"The Fed will not rush for the exit," said Lena Komileva, economist at Tullett Prebon. "The potential for further (easing) remains if weak labor and housing activity continue to depress inflation trends."

Financial markets, which focused on the new jobs data, showed little reaction to Bernanke's remarks.

The U.S. jobless rate dropped to 9.4 percent in December, the lowest rate since May 2009 and down from 9.8 percent a month earlier, but the decline was partly due to a troubling rise in the number of people exiting the workforce.

Echoing Bernanke, Fed Board Governor Elizabeth Duke said in a separate speech that the recovery appeared to be gathering steam, but both hiring and inflation would likely remain subdued.

"I am encouraged by signs that the recovery may have gained traction recently," Duke said.

The improvement in the economic backdrop has prompted Wall Street investors to begin pondering a possible reversal in Fed policy as early as the end of this year. In the summer, few expected anything in the way of monetary tightening until at least 2012.

Highlighting lingering concern at the Fed about how deep a hole the economy must climb out of, another official emphasized that the bond-buying program had been necessary to lift a recovery that was too weak to dent high unemployment.

"More recent data have been coming in somewhat stronger," Chicago Fed President Charles Evans said in a speech. "But they do not yet point to the kind of robust, self-perpetuating recovery that we need in order to close today's large resource gaps within a reasonable amount of time.

Evans is one of the most outspoken backers of aggressive Fed actions to spur growth, and is a voter on the central bank's policy-setting panel in 2011.

The disappointing jobs growth figure reported by the Labor Department on Friday suggested the Federal Reserve would likely stay the course with its effort to support the world's biggest economy with the purchase of $600 billion in government bonds.

The department's survey of non-farm employers showed payrolls increased 103,000 last month, below economists' expectations for 175,000. Private hiring rose 113,000, while government employment fell 10,000.

"A very disappointing number that reinforces the idea that we're in for a long, slow jobless recovery. The Fed simply cannot relent until they see unemployment at least below 9 percent," said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey.

Tempering the disappointment, overall employment for October and November was revised to show 70,000 more job gains than previously reported.

U.S. stocks opened marginally higher, while Treasury debt prices erased losses on the data. The dollar initially slipped against the euro, but then reversed course.

The unemployment rate fell to 9.4 percent, the lowest since May 2009, from 9.8 percent in November. However, the drop in the jobless rate was mixed news.

A survey of households from which the unemployment rate is derived showed a big increase in employment but also a sharp decline in the labor force. Those factors combined to lead to the biggest drop in the jobless rate since April 1998.

Though the labor market recovery remains very slow, the broader economy is showing signs of strengthening, with data on consumer spending and manufacturing improving.

Federal Reserve Chairman Ben Bernanke, in congressional testimony prepared before the jobs data was public, sounded a slightly more optimist tone than in his last public remarks in early December.

"We have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold," the central bank chief told the Senate Budget Committee, without offering a view on the future course of monetary policy.

MIXED NEWS

Data showing a firming in consumer and business demand had led to calls for the U.S. central bank to scale back its widely criticized bond-purchasing program aimed at keeping interest rates low to boost demand.

Some policymakers indicated in December they had a "fairly high" threshold for curtailing the stimulus program.

Some analysts looked at the drop in the unemployment rate as good news. However, the labor force participation rate, a measure of how many potential workers are actually in the job market, dropped to 64.3 percent, yet another fresh cycle low.

Non-farm payrolls increased by an estimated 175,000 after November's slim 39,000 gain, according to a Reuters survey.

Job growth last May was boosted by temporary hiring for a decennial census. By contrast, the private sector is expected to have driven jobs growth in December -- up 180,000 for its biggest gain since April, according to the Reuters poll.

"The recovery is becoming more sustainable and less dependent on temporary growth factors, particularly inventories," said Harm Bandholz, chief U.S. economist at UniCredit Research in New York.

"There is more support coming from private demand, particularly consumption. But the labor market improvement is still way slower than what everybody would hope for."

The Labor Department will release the closely watched employment report at 8:30 a.m. and it is expected to add to a run of stronger U.S. economic data.

Speculation about a strong jobs report helped push the U.S. dollar to a five-week high against the euro on Thursday.

"There's a strong consensus that there will be some good numbers coming out of the (United) States tomorrow ... and expectation of a huge payrolls number is fueling all sorts of dollar buying," said C.J. Gavsie, managing director of FX sales at BMO Capital Markets in Toronto.

Nonetheless, the unemployment rate is expected to have only ticked down to 9.7 percent from 9.8 percent in November.

Strong employment numbers for December would be a boost for President Barack Obama. High joblessness cost his Democratic Party control of the U.S. House of Representatives.

Federal Reserve officials will weigh the jobs report when they meet on January 25-26. Signs of strength could increase calls for the U.S. central bank to scale back its widely criticized $600 billion government bond-purchasing program.

Some policymakers indicated in December they had a "fairly high" threshold for curtailing the stimulus program.

FED TO STAY THE COURSE

Fed Chairman Ben Bernanke speaks on the economic outlook before the Senate Budget Committee at 9:30 a.m..

Analysts say the Fed's focus is on unemployment and expect it to complete the bond-buying plan.

* Economists expect U.S. non-farm payrolls, due at 8:30 a.m. ET, to show 175,000 new jobs created in December, the highest level since May, though the unemployment rate is seen edging down only slightly to 9.7 from 9.8 percent.

* Key jobs data report comes after 8 percent rise in the S&P 500 since the start of December.

* U.S. stocks slipped on Thursday, pressured by soft retail sales and a sharp rise in the dollar.

* Ben Bernanke delivers his first congressional testimony since the Federal Reserve launched a controversial bond-buying policy, and may put the brakes on some of Wall Street's optimism surrounding a recent rebound in key economic data.

* U.S. Republicans acknowledged on Thursday they will have to sign off on more deficit spending to avoid a debt default that could roil financial markets and bring the government to a grinding halt.

* In company news, Sara Lee Corp (SLE.N) is considering the spin-off of its meat and coffee businesses after rejecting a takeover bid last month from Brazil's JBS SA (JBSS3.SA), a source familiar with the situation said on Thursday.

* The Chinese securities regulator on Friday approved the local joint ventures of J.P. Morgan Chase & Co (JPM.N) and Morgan Stanley (MS.N), bringing the banks a step closer toward operating securities businesses in China that they, and other banks, have long sought.

* Citigroup (C.N) is seeking buyers for CitiFinancial, the largest consumer finance company in the United States, in a deal that could raise hundreds of millions of dollars, the Financial Times said.

* The Pentagon has overhauled the Lockheed Martin Corp (LMT.N) F-35 fighter project for the second time in a year and said it would buy 41 Boeing Co (BA.N) F/A-18 combat planes over the next three years to offset slower production of the Lockheed plane.

* The United States plans to cut $78 billion in defense spending over five years, including a reduction of up to 47,000 troops, in a politically contentious move that would trim the government's growing budget deficit.

* Three dry wells drilled by Murphy Oil Corp (MUR.N) off the Republic of the Congo will cost it $36 million in the fourth quarter, the U.S. oil company said on Thursday.

* The board of bailed-out insurer American International Group (AIG.N) approved a dividend for shareholders on Thursday that assumes its recapitalization plan will close as soon as next week.

* In Europe, the pan-European FTSEurofirst 300 .FTEU3 index of top shares was down 0.3 percent in early trade, with investors cautious ahead of the widely-watched U.S. payrolls data.

(Reporting by Harpreet Bhal; Editing by Greg Mahlich)

The greenback remained buoyed by an unexpectedly strong ADP employment report earlier in the week which showed a record number of private sector jobs created in December and prompted economists to raise their forecasts for the payrolls data.

"The U.S. jobs number is a mega factor going into 2011 for policymakers as well as markets," said Tom Kaan, a director at Hong Kong-based Louis Capital Markets.

"I'd say the recent dollar strength is more likely due to profit-taking on short positions because people were so bearish but if we see U.S. unemployment dip even slightly, it'll mean that things have actually started getting better," said Kaan.

Non-farm payrolls probably increased by an estimated 175,000 in December and the jobless rate eased to 9.7 percent from 9.8 percent, according to a Reuters survey.

The U.S. Labor Department will release the closely watched report at 8:30 a.m. ET.

Another key event on Friday is Federal Reserve Chairman Ben Bernanke's testimony on the U.S. economic outlook to the Senate Budget Committee, which investors will scrutinize for updates on the Fed's plan to continue buying bonds until June.

The dollar index .DXY, which measures the greenback's performance against a basket of major currencies, on Friday hit a high of 80.95, a level last seen in early December.

A selloff in peripheral euro zone government bonds before a series of bond issues next week, and an EU proposal that could force those who lend to banks to bear big losses should they fail, helped knock the single currency lower across the board.

Portugal, widely seen as the next euro zone state at the risk of needing a bailout after Greece and Ireland, will lead a series of debt auctions from European nations next week.

ASIAN STOCKS EASE, JAPAN OUTPERFORMS

Japan's Nikkei .N225, lifted by a strong day on Chinese bourses, recovered from earlier losses to make a 0.1 percent gain on the day, taking its weekly rise to 3 percent and extending its recent outperformance among Asian markets.

The MSCI Asia ex-Japan .MIAPJ0000PUS fell 0.5 percent and was down 0.2 percent in its first week of trading for the year.

Shares in Samsung Electronics (005930.KS), the world's No.1 memory chip maker, fell 1.3 percent after the company forecast weaker-than-expected fourth quarter earnings. Most analysts see this a blip, with demand for many of the company's businesses, including smartphones, picking up.

Samsung shares are up nearly 25 percent over the past quarter and hovering near record highs.

Facing a newly-empowered Republican Party skeptical of the Fed's latest attempt to stimulate the U.S. economy, Bernanke may put the brakes on some of Wall Street's optimism surrounding a recent rebound in key economic data.

Having been burned before by maintaining a rosy outlook even as the housing crisis deepened, Bernanke is likely to make sure the growth trend is firmly entrenched before sounding too chipper.

Minutes from the Fed's December policy-setting meeting revealed a good deal of caution about recent improvements in the economic data, including a high threshold for curtailing the plan to buy an additional $600 billion in bonds announced in November.

"While the economic outlook was seen as improving, members generally felt that the change in the outlook was not sufficient to warrant any adjustments to the asset-purchase program," said the minutes, published earlier this week.

Bernanke will most likely stick to that script before the Senate Budget Committee, even though the numbers have indeed pointed to a pickup in business activity -- and glimmers of hope on the hiring front.

He will have to explain why yields on benchmark Treasury notes have jumped 1 percentage point since the Fed's bond buys were announced, moving in the opposite direction of what was intended.

The chairman may nod to a possible short-term boost to the economy from President Barack Obama's tax cut deal with Republicans. But he might also echo his staffers' assessment that the package does not materially brighten the longer-term horizon.

"It's easy and quite reasonable for him to say it's all very preliminary, and that it will be sometime before the improving trends are firmly entrenched," said Lou Crandall, chief economist at Wrightson Associates in New York.

Indeed, U.S. unemployment remains near 10 percent and economic growth -- running at 2.6 percent on an annualized basis at latest blush -- remains too weak to boost hiring significantly.

RELUCTANTLY FISCAL

Bernanke's testimony, scheduled for 9:30 a.m. EST, will come just an hour after the Labor Department releases its closely-watched monthly employment report.

It is expected to show the economy generated 175,000 new jobs in December, which would mark the best monthly result since May. The jobless rate is expected to dip slightly to 9.7 percent from 9.8 percent.

Against that backdrop, it will hardly be a great surprise if Bernanke proves less than jubilant.

"We probably need to get through two more jobs reports and he will probably use the next semiannual (testimony in February) to lay out the next phase," said Troy Davig, senior economist at Barclays Capital in New York. "It would be surprising if he ventures too far from or signals anything beyond what was laid put in this week's minutes."

The widely-expected decision will enable the two Wall Street banks to underwrite stocks and bonds in one of the fastest growing securities markets in the world.

But the two banks will have to wait another five years before their joint ventures are able to start the more lucrative broking operations.

While foreign banks are attracted to China's rapidly growing economy and capital markets, finding the right partner for a joint venture and regulatory restrictions have delayed and sometimes derailed their attempts to enter Chinese markets.

"This was a gap we had in our franchise which we have filled now," said Zili Shao, chairman and CEO of J.P. Morgan's China's operations. "But we have a lot of work to do to make best use of this platform." he added.

The long awaited approvals come just ahead of Chinese President Hu Jintao's visit to the United States from January 18.

Sun Zhe, a professor at Tsinghua University in Beijing who studies China-U.S. relations, said that China has been making concessions in a show of goodwill before Hu's visit.

The approval allows J.P. Morgan to make its maiden entry into the Chinese securities market, while Morgan Stanley will make a come back after exiting a joint venture with China International Capital Corp (CICC) last year.

J.P. Morgan will link up with First Capital Securities Co, a Shenzhen-based brokerage, and hold 33 percent of the venture.

Morgan Stanley meanwhile, is able to move ahead with its new Chinese partner, Huaxin Securities Co Ltd, also known as China Fortune Securities Co Ltd.

Morgan Stanley was an early entrant into China when it formed a JV with CICC in 1995, but recently sold its stake to a group of investors including KKR, TPG and Singapore's GIC.

BOOMING CHINA MARKET

Morgan Stanley will hold a one-third stake in the new joint venture, which will be called Morgan Stanley Huaxin Securities Co Ltd and registered and principally located in Shanghai.

Chinese IPO markets have taken off in the past two years, with total proceeds from last year's offering rising to $69.5 billion, compared with just $9.5 billion in 2008, according to Thomson Reuters data.

China has dominated global IPOs, accounting for about 27 percent of global volumes last year. Similarly, the bond market in China has more than doubled since 2008 to $172 billion in 2010.