Stocks ended at the lowest levels of the trading session as late buying efforts following positive comments from Treasury Secretary Henry Paulson fizzled ahead of the weekend.
"It's the end of a very difficult week with a critical selloff in the last 15 minutes of trading, but I think Secretary Paulson's comments will be studied over the weekend because they are very reassuring," said James Maguire, Sr., managing director at LaBranche & Co.
The Dow Jones Industrial Average fell more than 200 points, ending at session lows. It was the worst two-day performance for the blue chip index on a percentage basis since January 2003. The S&P 500 fell 1.6% while the Nasdaq Composite ended down 1.4%.
For the week, the Dow lost 4.2% of its value while the S&P and Nasdaq ended with weekly declines of 4.9% and 4.7%, respectively. Meanwhile, the Russell 2000 saw weekly losses of 7.0%. It was the worst week for the Russell index of small cap stocks since September 2001.
Despite the worst weekly performance for U.S. markets in several years, a number of market strategists maintained an optimistic tone on the overall markets.
"There's no way to know what's going to happen on a day-to-day or week-to-week basis, but if you have a six- or twelve-month time horizon, we would turn down the volume on the short term and be buying into this to make money over the next year," said David Katz, chief investment officer at Matrix Asset Management.
We've got a dislocation in the credit markets, and typically dislocations create opportunities," said Jeff Schappe, chief investment officer at BB&T Asset Management. "If you just take a step back and look out a year or more, I think the equity market has decent upside, the factors are essentially the same, and even the credit markets will tend to sort themselves out."
Friday's declines were broad-based, with nine of 10 S&P economic sectors trading down.
Energy was the worst performing sector, falling more than 2%, despite higher oil prices and good earnings from Chevron , which topped earnings forecasts, reporting second-quarter net income of $2.52 a share.
Boeing and 3M were the biggest percentage gainers on the Dow.
Stocks were given a lift following reassuring comments from Treasury Secretary Hank Paulson.
CNBC broadcast a roundtable with the White House economic team, including Treasury Secretary Hank Paulson, who said the U.S. economy is strong but the markets' readjustment is a wakeup call. Paulson noted, however, risks in the subprime mortgage market are largely contained.
"The market had a shock, not unlike a heart attack, and it's really testing itself to see if it's strong enough to go to the corner and get the newspaper," Arthur Cashin, UBS director of floor operations, told CNBC.com. "There's some sense that the broadcast from Washington (on CNBC) is somewhat reassuring, but I think what really bumped us up was the fact that the yen leveled off and that eased pressure on the unwinding in the carry trade."
In economic news, the Commerce Department said the U.S. economy grew at a 3.4% pace in the second quarter, the strongest showing in more than a year. GDP was expected to have grown by 3.3%, according to analysts surveyed by CNBC and Dow Jones.
Investors were also encouraged by a drop in the chain deflator, a key inflation measure, which fell to 2.7%, lower than consensus.
Treasury prices were higher, sending yields lower.
Concern over the rising cost of debt, a key factor for recent stock market losses, could signal a slow down in the current leveraged-buyout boom.
Private-equity firm Kohlberg Kravis Roberts might fall foul of the loan-related worries as it could be forced to postpone its initial public offering, according to a report on the Wall Street Journal Web site Friday, citing Jeff Arricale of the T. Rowe Price Group.
"I think there is a little bit more downside to come, but I think the flu season will be over pretty soon and we'll get back on track, probably within the next couple of weeks," said Frank Chester, a trader with E.H. Smith Jacobs.
Radio and outdoor advertising company Clear Channel Communications reported earnings of $236 million during the second quarter, 19% more than the same period last year. The company said outdoor ads continued to see strong growth.
New York light crude futures rose to trade above $75 a barrel as traders reacted positively to the higher GDP number, believing economic growth will lead to higher fuel consumption.
European shares finished lower in a volatile session.
The London FTSE-100 , the Paris CAC-40 and the Frankfurt DAX all closed lower.
Concerns about volatility in debt financing saw Britain's Cadbury Schweppes extend its deadline for selling its U.S. drinks business. The company insisted in a statement Friday that interest in the business remains strong. Shares in Cadbury Schweppes fell.
Corporate earnings continued to filter through to the market, with Gaz de France posting a worse-than-expected 11% decline in its first-half sales. Unusually warm weather appears to have hurt the national energy giant's revenue for the period. Shares in GdF traded lower.
Volkswagen, Europe's biggest automaker by sales, said that its profit in the second quarter and first six months of 2007 soared on better-than-expected sales in Europe and China.
Meanwhile forecast-beating earnings from Reuters failed to lift shares of the media company.
Asian Shares Lower
Tokyo's Nikkei 225 Average dropped 2.36% to its lowest in nearly three months on a plunge in the U.S. market and a stronger yen, while this Sunday's
parliamentary election kept the market in check.
Canon tumbled after cutting its annual profit outlook, becoming the Nikkei's biggest drag, while Fujitsu also plunged on its dimmer forecast.
South Korea finished a whopping 4% down, marking the market's biggest percentage fall in three years, as foreign investors sold off heavily amid a weakening U.S. housing sector and worries that a global market rally was coming to an end.
Blue chip stocks such as Samsung Electronics and Hyundai Heavy Industries were among the biggest daily losers. Despite Friday's declines, the KOSPI was only at its lowest close since July 6 after scaling a series of record highs throughout the month.
Hong Kong stocks fell 2.8% amid a cross-the-board selloff in sympathy with sliding global equities as investors worried that U.S. credit woes could herald a broader financial crunch. One bright spot was China COSCO Holdings, which traded to all-time highs on news that the shipping conglomerate was considering issuing domestic A shares to buy its parent's bulk carrier fleet, the world's largest.
Chinese shares fared well amid the global downturn, closing with marginal losses. Wall Street's tumble has little direct impact on China since foreign investment in the domestic Chinese market remains relatively small. Traders said the global weakness had a psychological impact, however, since the Shanghai market continues to trade at high levels, traders said.