The Dow Jones Industrial Average fell 17 points, or 0.1%, to 13,341. Earlier, the Dow hit an intraday high of 13,451.38.
Of the Dow's 30 components, 20 were in negative territory. Among the biggest decliners were General Motors Corp. , which fell 2.5%, J.P. Morgan Chase , down 1.6%, and Citigroup , down 1.5%.
The S&P 500 Index edged down 1 point to 1,457 and the technology-laden Nasdaq Composite fell 5.77 points, or 0.2%, to 2,671.
The Dow is on track for a yearly gain of 7%, the S&P for a gain of 4% and the Nasdaq for a rise of 10.7%.
The new home sales report was "the turning point and pushed it [the market] lower," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank. "The number was quite a bit weaker than expected."
Sales of new U.S. homes fell by 9% in November to a seasonally adjusted annual rate of 647,000, their lowest since April 1995, the Commerce Department reported Friday.
On average, economists surveyed by MarketWatch were expecting new-home sales to drop to a seasonally adjusted annual rate of 710,000 in November.
"It points to the fact that we're having a housing recession," Fitzpatrick said. "We're going to see these types of numbers on the housing side that are quite negative. [However,] when you look at the broader picture, we're still looking at an economy that's growing at a slower rate, but still growing."
On the bright side, business activity in the Chicago region improved in December, according to a survey of corporate purchasing managers released on Friday. The Chicago purchasing-managers' index rose to 56.6% in December from 52.9% in November. Readings of more than 50% indicate that more companies were expanding than contracting.
Overall, the stock market has had a decent December, said Chuck Carlson, CEO of Horizon Investment Services. But, it's getting tuckered out.
"This market feels a little bit like the individual who completes the Iron Man triathlon, where they're gasping and gasping to the finish line. They do finish the race, but they don't have a whole lot left after that," he said. Carlson thinks the first couple of weeks of the new year will be tricky because of that.
On Thursday, U.S. stocks fell sharply after the assassination of Pakistan opposition leader Benazir Bhutto and a weaker-than-forecast rise in durable-goods orders, with the Dow Jones Industrial Average ending the session down nearly 200 points.
On the New York Stock Exchange, 592 million shares were traded, with advancers equaling decliners.
On the Nasdaq, 812 million shares exchanged hands, with decliners outpacing advancers 4 to 3.
Bond insurers sell off
The battered bond insurance industry took another hit on Friday after Warren Buffett's Berkshire Hathaway
reportedly started a rival firm targeting municipal issuers. The new firm, Berkshire Hathaway Assurance, is a bond insurer for cities, counties and states that issue bonds to finance sewer systems, schools, hospitals and other public projects, according to a report in the Wall Street Journal.
Shares of rivals Ambac and MBIA dropped 14% and 15.4% respectively.
Separately, Berkshire Hathaway is going to buy a reinsurance unit for $433 million from Holland's ING .
The Journal also reported that some major banks, including Citigroup and HSBC Holdings , are considering selling off a range of various assets.
Citigroup could sell 80%-held Student Loan Corp. , its North American auto-lending unit, its 24% stake in Brazil credit card operation Redecard and the bank's Japanese consumer finance business, the newspaper reported.
HSBC may ell its auto-finance business, the report said. Separately, Swiss bank UBS said it will not proceed with the acquisition of Standard Chartered Bank's mutual-funds management business in India.
Dubai World increased its stake in MGM Mirage to 6.5%, buying 5 million shares of the casino operator from billionaire Kirk Kerkorian at $84.25.
Shares of MSC Industrial dropped 4% after Bear Stearns downgraded the company to peer perform from outperform, citing concerns that the U.S. maintenance, repair and overhaul market will modestly slow in the next couple of months.
Shares of Genesco Inc. surged 15%, after a judge ruled that executives of the shoe retailer -- target of a $1.5 billion buyout by Finish Line Inc. -- didn't commit fraud during merger negotiations and ordered Finish Line to complete the deal.
Crude-oil futures also gained, with the February contract surging 88 cents to $97.50 a barrel, playing off a combination of ongoing tensions in Pakistan and a slump in U.S. crude inventories.
"The market is going to keep a very close eye on what's happening in Pakistan," said Peter Cardillo, chief market economist at Avalon Partners. "The key will be what happens with the price of gold and oil if there is any escalation of violence."
Gold futures for February delivery rose $7 to $838.80 an ounce, continuing to gain from safe-haven demand and dollar weakness.
The dollar extended early losses following the new-home sales data, raising expectations the Federal Reserve will cut interest rates again in 2008. The dollar index, which tracks the greenback against a basket of other major currencies, fell 0.5% to 76.260.
Treasury bonds extended their gains, with the benchmark 10-year Treasury note rising 27/32 to 101 8/32, its yield falling to 4.096%.
By Polya Lesova