Last updated 4:10 p.m. Eastern
Stocks plunged Friday, erasing all of the previous day's big gains, as a drop in consumer spending fanned worries that the economic recovery won't be sustainable.
Major stock indexes tumbled more than 2 percent in early afternoon trading, including the Dow Jones industrials, which gave back all of Thursday's 200-point gain. The biggest declines were among banks, energy and materials companies.
As stocks fell, investors moved to safer assets like the dollar and Treasurys.
Investors started shedding stocks after the Labor Department said personal spending fell 0.5 percent in September. Though the decline was in line with forecasts, it was the largest drop in nine months and followed a 1.3 percent jump in August fueled by the government's popular Cash for Clunkers car rebate program.
The decline marked an about-face for the market, which had rallied on Thursday after the government reported ain gross domestic product in the third quarter. The stronger-than-expected growth came after four straight quarters of declines and was the most promising evidence yet that the longest recession since the 1930s has ended.
However many economists worry that much of that growth came from government stimulus measures, and that without a rebound in consumer spending the economic recovery won't be sustainable.
"I think you have a market that is ultimately looking for its direction," said Bob Froehlich, senior managing director at Hartford Financial Services. "We really are at the inflection point. You tend to have an overreaction to both extremes."
Other analysts expressed similar caution.
"The positive GDP report tells us the recession ended this summer and the recovery has begun. It does not tell us that we are recovered," economist Lakshman Achuthan told CBS News correspondent Anthony Mason.
A drop in the mood of consumers added to the day's bad news. The Reuters/University of Michigan consumer sentiment index fell to 70.6 in October from 73.5 in September. The reading was revised slightly higher from a preliminary estimate of 69.4 earlier this month, and was roughly in line with expectations.
The market is paying close attention to indicators of consumer spending, which is still in a slump despite improvements in other parts of the economy such as manufacturing and housing. Spending by consumers makes up a major part of the U.S. economy.
According to preliminary calculations, the Dow closed down fell 249.85, or 2.51 percent, to 9,712.73. The Standard & Poor's 500 index fell 29.92, or 2.81 percent, to 1,036.19, and the Nasdaq composite index dropped 52.44, or 2.5 percent, to 2,045.11.
Five stocks fell for every one that rose on the New York Stock Exchange. Volume came to 1.6 billion shares compared with 1.5 billion Thursday.
Friday marks the end of the fiscal year for many mutual funds, which could be adding to the selling pressure in the market, analysts said. Fund managers looking to minimize taxes for shareholders often sell some of their investments as the fiscal year comes to a close.
The Labor Department also reported Friday that personal income, the fuel for future spending, was flat in September compared with the previous month, in line with expectations. A lack of income growth is due, in part, to ongoing high unemployment rates, also a major worry for the market.
"Until we get to better employment numbers, it's hard to get real income growth and real spending ... and we're just not there yet," said Kurt Karl, chief US economist at Swiss Re. "Today is a reaction to a little bit of excess exuberance yesterday."
Stocks have fallen for most of the past week on worries about the economy. A stronger dollar, which hurts commodities prices, has also weighed on the market.
The dollar rose again Friday, sending commodity prices lower. On the New York Mercantile Exchange, gold prices slipped about $9 to $1,037 an ounce, while oil prices tumbled $2.38 to $77.49 a barrel.
Bond prices rose sharply as stocks fell. The yield on the benchmark 10-year Treasury note fell to 3.41 percent from 3.50 percent late Thursday.
Analysts say trading is likely to remain volatile in the coming week amid a flood of major economic news, including the Institute of Supply Management's readings on the manufacturing and services industries, sales reports from major retailers and the Labor Department's October employment report - arguably the month's most important piece of economic data. The Federal Reserve will also convene for a two-day policy meeting beginning Tuesday.
Without stronger evidence that the labor market is improving and consumers are feeling more comfortable about spending, investors will have trouble extending the market's massive rally into a ninth month. Even with this week's declines, the S&P 500 index is up about 55 percent since hitting a 12-year low in early March.
About six stocks fell for every one that rose on the New York Stock Exchange, where volume came to 560.8 million shares, compared with 650.7 million at the same time a day earlier.
In other trading, the Russell 2000 index of smaller companies fell 16.97, or 2.9 percent, to 563.25.
Overseas, Japan's Nikkei stock average rose 1.5 percent. Britain's FTSE 100 fell 1.8 percent, Germany's DAX index dropped 3.1 percent, and France's CAC-40 declined 2.9 percent.