U.S. Stocks Plunge On Bear Stearns Bailout; Wipe Out Week's Gains

NEW YORK (MarketWatch) -- U.S. stocks plunged Friday after Bear Stearns Cos. had to be bailed out by the Federal Reserve, shocking Wall Street and ending a week that saw one of the best trading days in five years wiped out by the biggest scare yet in the ongoing credit crisis.

"People realized that Bear Stearns just came out the other day saying everything was fine," said Paul Nolte, director of investments at Hinsdale Associates. "So, two days later, why would they need this funding from the Fed and J.P. Morgan? If it's like that for them, what is it like for Merrill Lynch or for Thornburg Mortgage?"

Poised for a starting rise in the wake of tame inflation data, the major stock indexes quickly shed opening gains after Bear Stearns said its liquidity had "significantly deteriorated" during the past 24 hours.

The news sent the Dow Jones Industrial Average plummeting over 300 points before moving back up. At the close, the blue-chip index was down 194.65 points, or 1.6%, to 11,951.09, with 29 of its 30 components posting losses and the index gaining 0.5% on the week.

Shares of Bear Stearns tumbled 47%, and left some questioning whether the brokerage would survive. .

Among blue-chip financials, Citigroup Inc. was down 6.1%, J.P. Morgan was off 4.1% and American Express Co. declined 4%.

Boeing Co. proved the sole Dow component chalking up gains, up 2.8% after its upgrade to overweight from equal weight at Morgan Stanley.

The S&P 500 dropped 27.34 points, or 2.1%, to 1,288.14, giving it a 0.4% gain on the week, while the Nasdaq Composite fell 51.12 points, or 2.3%, to 2,212.49, virtually unchanged from a week ago.

Volume on the New York Stock Exchange topped 1.8 billion, and for every stock on the rise, five fell. On the Nasdaq, 1.3 billion shares were exchanged, and decliners outran advancers about 3 to 1.

Crude oil for April delivery fell 12 cents to end at $110.21 a barrel on the New York Mercantile Exchange. .

Elsewhere on the NYME, gold futures hit a record high of $1,009.00 an ounce, with the contract for April delivery rising $5.70 to close at $999.50 an ounce. .

The dollar trimmed losses but remained under pressure Friday after touching new lows against the euro and Swiss franc, with the dollar index recently at 71.66, down from 72.047 in London trade earlier on. .

Bearing down

Bear Stearns had worked with J.P. Morgan Chase and the Federal Reserve Bank of New York to secure funding, Bear Stearns and J.P. Morgan said in separate statements. .

"People are concerned about Bear Stearns and financials and not trading on anything else," said Art Hogan, chief market strategist at Jefferies.

"It's a continuation of the financial crisis that's been going on for the last six months," said John Derrick, director of research, U.S. Global Investors. .

Consumers not so confident

The stock market had initially opened slightly higher Friday on a Labor Department report showing the consumer price index held flat in February, defying expectations for a 0.2% increase. .

However, the University of Michigan/Reuters consumer confidence index was reported to have dropped to 70.5 in March, a 16-year low, from 70.8 in February.

On Thursday, U.S. stocks had recovered from opening losses, and the Dow industrials ended up 35 points, the Nasdaq Composite advanced 19 points and the S&P 500 gained 6 points.

Shares of both Microsoft Corp. and its reluctant target, Yahoo Inc. , were down -- Microsoft off 2.5% and Yahoo declining 3.4% -- on reports the two met earlier this week without reaching agreement on Microsoft's merger proposal. .

In Europe, stocks took a quick turn for the worse on the Bear Stearns news, which fanned concerns for rivals overseas. .

By Kate Gibson