Investors were unnerved by disappointing quarterly results from American International Group Inc. and Dell Inc. And an index of regional business activity that Wall Street regards as a good indicator of a broader report set to arrive next week had its weakest showing in more than six years.
Oil prices continued to stir concern about inflation after for the first time.
Crude oil prices are so high in part because the dollar keeps falling, reports CBS News correspondent Bill Whitaker. That leaves people like Leslie Martinez caught in an economic vice.
"As of January 1st of '08, our mortgage increased approximately $400 a month -- that plus gas has definitely impacted us tremendously," she told Whitaker.
And the summer driving period, when gas prices usually heat up, is still months away.
While stocks made sharp gains in the first three days this week even amid somewhat lackluster economic readings, the litany of concerns investors succumbed to Friday reflected the undercurrent of uncertainty that has kept Wall Street on edge for months.
"We really had to face a plethora of negative news," said Art Hogan, chief market strategist at Jefferies & Co. in Boston. "We just ran out of gas this week."
Hogan said while stocks held up admirably early in the week amid an uneven flow of economic news, they couldn't hold their gains after the latest round of weak economic signals.
The Dow fell 315.79, or 2.51 percent, to 12,266.39. The decline more than erased the week's 200 point gain and sent stocks lower for February, the fourth straight month of declines.
Broader stock indicators also tumbled. The Standard & Poor's 500 index lost 37.05, or 2.71 percent, to 1,330.63, and the Nasdaq composite index declined 60.09, or 2.58 percent, to 2,271.48.
For the week, the Dow lost 0.93 percent, while the S&P 500 gave up 1.66 percent and the Nasdaq fell 2.58 percent. The week's losses would have been steeper had stocks not risen early in the week on hopes many of Wall Street's credit troubles were easing and after IBM Corp. announced a sizable stock repurchase plan.
Bond prices rose sharply as stocks lost ground. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.52 percent from 3.67 percent late Thursday.
The Chicago Board Options Exchange's volatility index, known as the VIX, and often referred to as the "fear index," jumped 12.5 percent.
The dollar fell further Friday after hitting another low against the euro and sliding to a three-year record against the yen. The slide in the dollar has sent prices of commodities such as oil and gold soaring.
Light, sweet crude jumped to a record of $103.05 overnight before settling down 75 cents at $101.84 a barrel on New York Mercantile Exchange.
Insurer AIG announced a $5.29 billion quarterly loss largely because of steep declines in the value of a portfolio of contracts known as credit default swaps. Such contracts pledge to cover missed payments on debt. The company's losses caught analysts off guard, as many had expected the company to turn a profit.
While each of the 30 stocks that comprise the Dow industrials showed declines, those of AIG were the steepest. The stock fell $3.29, or 6.6 percent, to $46.86.
Computer maker Dell posted a 6 percent decline in its quarterly profit, falling below analysts' expectations, and warned that its business could suffer from reduced customer spending. Dell slid 97 cents, or 4.7 percent, to $19.90.
Bill Shultz, chief investment officer at McQueen, Ball & Associates, said AIG's report left investors uneasy about the prospect of further sizable write-downs of bad debt.
"Every time we get to a point where we think we've finished, another report comes out and says we're not done yet," he said.
He expects Wall Street will continue to proceed with "fits and starts" until investors sense that the bad debt from faltering mortgages has been accounted for and that balance sheets are on the mend.
Some relief for the ailing bond insurance industry is on the way, though the news did little to dislodge Wall Street's glum mood Friday. Billionaire investor Wilbur Ross agreed to invest up to $1 billion in Bermuda-based reinsurer Assured Guaranty Ltd. Assured Guaranty rose $2.87, or 12.6 percent, to $25.65.
In economic news, the Chicago purchasing managers index for February came in at 44.5, a weaker reading than the 48.5 that had been expected, according to Dow Jones Newswires. The report painted a dreary picture of the manufacturing sector and is seen as a precursor to the national Institute for Supply Management report expected Monday.
A government report showed that personal spending, when stripping out the effects of inflation, stood unchanged in January. The findings arose further concern that consumers are more hesitant to reach into their wallets amid the uncertainties facing the economy.
A parade of economic worries has weighed on consumer as well. The Reuters-University of Michigan final consumer sentiment reading for February came in at 70.8, better than the figure of 69 that had been expected. Still, the index was well off the level of 78.4 seen in January.
Declining issues outnumbered advancers by about 8 to 1 on the New York Stock Exchange, where volume came to 1.76 billion shares compared with 1.46 billion shares traded Thursday.
The Russell 2000 index of smaller companies fell 19.54, or 2.8 percent, to 686.18.
Overseas, Japan's Nikkei stock average closed down 2.32 percent. Britain's FTSE 100 closed down 1.36 percent, Germany's DAX index fell 1.67 percent, and France's CAC-40 fell 1.67 percent.