"From an earnings perspective, we're already in recession," said Jack Ablin, chief investment officer at Harris Private Bank.
The major indexes fell to new session lows after a top Federal Reserve official said investors have been too focused on individual interest-rate cuts rather than the overall direction of monetary policy.
The Dow Jones Industrial Average broke through to new session lows, falling more than 300 points, after Fed Gov. Frederic Mishkin spoke in New York.
In the end, the Dow dropped 246.8 points to end at 12,606.3, with 26 of its 30 components finishing lower as the blue-chip index tallied its worst percentage performance over the opening eight trading sessions of any year since 1991, when it fell 5%, yet finished the full year up 20%.
Since the start of 2008, the Dow has dropped 658.52 points, or 5%. For the week, the Dow declined 1.5%.
On Friday, the Dow's declines were led by American Express Co. , which ended down 10.1%, after the credit-card issuer followed in Capital One's footsteps, warning of a pretax charge of $440 million in the fourth quarter to cover higher delinquencies and loan write-offs.
Fast food nation
McDonald's Corp. was the Dow's second-worst performer, with shares of the fast-food giant ending down 6.6% on investor worries about future sales.
Dow gainers included Citigroup Inc. , which closed 1.6% higher, while still tallying a 3% lose since the year began.
The S&P 500 dropped 19.31 points to 1,401.02, with the plunge translating into a weekly decline of 0.7%, while the Nasdaq Composite fell 48.58 points to 2,439.94, off 2.6% for the week.
Since the start of the year, the S&P has fallen 4.6%, while the Nasdaq Composite has lost 8% of its value.
Volume on the New York Stock Exchange came to nearly 1.8 billion, and decliners topped gainers nearly 2 to 1. On the Nasdaq, 2.4 billion shares changed hands, and declining stocks topped those falling more than 2 to 1.
On the New York Mercantile Exchange, gold futures closed higher for a fourth day, topping $900 an ounce for the first time, hitting $900.10 before dropping back to $897.7 an ounce, up $4.10. .
Elsewhere on the NYME, crude-oil futures dropped for a third day straight to end 81 cents lower at $92.90 a barrel. .
U.S. stocks had jumped Thursday, buoyed by comments from Federal Reserve Chairman Ben Bernanke suggesting "aggressive" rates action, as well as talk that Bank of America was in talks to buy Countrywide Financial Corp. The Dow industrials closed with a 117-point advance, the S&P 500 rose 11.2 points and the Nasdaq Composite tacked on nearly 14 points.
But the mood wasn't nearly as cheery Friday, even as Bank of America Corp. confirmed it was buying the embattled Countrywide for $4 billion in stock. .
In other deal-related developments, Dow component J.P. Morgan Chase Co. has had preliminary talks with Washington Mutual Inc. about acquiring the mortgage giant, the cable channel CNBC reported Friday morning.
Loans gone bad
The largest U.S. brokerage firm, Merrill Lynch , is expected to report losses of $15 billion stemming from soured mortgage investments, according to a New York Times report Friday.
CIT Group joined the write-down parade, seeing charges of $355 million.
The trade gap in November unexpectedly widened to $63.1 billion, while import prices were unmoved in December. .
Tiffany & Co. lowered the top end of its profit forecast after a decline in holiday sales in the U.S., offering further evidence of slowing consumer spending. .
Shares of the upscale jeweler closed off 11.2%.
RF Mico Devices , a supplier to Motorola and Nokia, issued a profit warning, citing reduced demand from Asian and "top-tier" customers.
Overseas action had several Asian markets ending sharply lower. .
In Europe, brokers turned negative on the food and consumer sectors, driving down sentiment across the board. .
By Kate Gibson