"We're concerned that the equity market can only absorb so much bad news. The pace at which economic conditions are deteriorating is certainly a cause for concern," said Dean Curnutt, president of Macro Risk Advisors.
The Dow Jones Industrial Average finished at 8,599.18, down 143.28 points, or 1.6%, for the session and was down 4.8% for the week.
All but two of the blue-chip index's 30 components tallied losses, with Citigroup Inc. the biggest laggard, its shares off 5.7% after the banking giant said former Treasury secretary Robert Rubin would retire from his post as senior counselor at the company.
Other media reports had Citigroup in talks to sell its Smith Barney brokerage unit, with a joint venture with Morgan Stanley possible.
Only pharmaceutical giant Johnson & Johnson and discount retailer Wal-Mart Stores Inc. ended in the black, though both with small gains.
"Personal consumption has the biggest potential for fallout. The sector to hide in, so to speak, would be consumer staples," said Curnutt.
The Labor Department said employers axed 524,000 jobs in December, compared to projections ranging from 600,000 to the 700,000 in losses estimated by payrolls processor ADP Wednesday. The U.S. unemployment rate rose to 7.2%, the highest in 16 years. .
"If there is a silver lining, you might argue that the jobs report reflects the severe credit crisis that we experienced late last year but does not yet reflect any of the recent improvement that we have seen in credit markets ... as well as the large upcoming Obama stimulus plan," said Michael Sheldon, chief market strategist, RDM Financial Group Inc.
On Capitol Hill, President-elect Barack Obama told a news conference the jobs report underlines the need for quick action on his stimulus proposal.
The S&P 500 declined 19.38 points, or 2.1%, to finish at 890.35, a level that translates into a 4.5% weekly loss.
Energy, consumer discretionary and financials paced the losses, which included all of the broad-market index's 10 industry groups.
One rising stock in the consumer discretionary sector was KB Home . Shares fell 2.8% after the home builder said its fourth-quarter loss was narrower than a year ago. .
The Nasdaq Composite shed 45.42 points, or 2.8%, to stand at 1,571.59, leaving it down 3.7% from last Friday's close. .
Shares of Rambus Inc. declined 39% after a federal court reportedly ruled the chip maker can't use certain patents to demand royalties from Micron Technology Inc. . Micron shares fell 3.5%.
Volume on the New York Stock Exchange topped 1.1 billion shares, and decliners topped advancing issues more than 2 to 1. On the Nasdaq, 777 million shares traded, and decliners overshot advancers almost 3 to 1.
On the New York Mercantile Exchange, crude-oil futures fell 87 cents to end at $40.83 a barrel.
Gold futures gained, with the front-month contract closing up 50 cents to $855 an ounce. The precious metal finished off 2.8% for the week.
Shares of Palm Inc. rallied nearly 34% to mark a second day of strong gains after the company introduced its new touch-screen smart phone. .
CVS Caremark Corp. shares dropped 12.4% after the drug-store chain projected a 2009 profit below expectations.
For some, getting a pink slip can be lucrative, with two top Dell Inc. executives leaving the faltering computer maker slated to receive more than $11 million in severance pay. .
Ahead of the jobs report, Asian stocks closed flat to lower, with losses in Tokyo, South Korea and Hong Kong.
In Europe, shares traded lower as an initial bounce aftr the release of the U.S. jobs data proved short-lived. .
Major U.S. stock indexes had closed mixed Thursday, as a lowered profit outlook from Wal-Mart Stores Inc. hurt the Dow industrials, and expectations for a better-than-expected profit helped Sears Holdings Corp. .
In the final hour of Thursday's trading, investors seemed cheered by news of a breakthrough agreement that could help curtail home foreclosures. But on Friday, the American Bankers Association spoke out against the proposal.
By Kate Gibson