The S&P 500 fell 23.20 points, or 1.8 percent, to close at 1,276.34. For the week, the broad market index declined 7.01 points or 0.55 percent.
The S&P 500's close below 1,280.26 means it ended below the prior eleven closes, which is a bearish sign, Rick Bensignor, market strategist at Dahlman Rose, said in a note to clients Friday.
The S&P 500 had hit 1,300 earlier in the session, before the sell-off. The last time the S&P 500 closed above that benchmark was Aug. 28, 2008.
The Nasdaqdeclined68.39 points, or 2.5 percent, to close at 2,686.89. For the week, the Nasdaq fell 2.65 points, or 0.10 percent.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, skyrocketed to nearly 24 percent, to more than 20. It was biggest daily spike in the VIX since June 4.
All key S&P 500 sectors sank, led by consumer discretionary, technology and telecom.
Stocks slumped as the protests in Egypt raised concerns the government was losing control, which would lead to instability in the region. The news was roiling markets worldwide.
The uncertainty surrounding the events also gave investors a reason to sell after five months of solid gains, and as the Dow and S&P bumped up against key thresholds, analysts said.
That and weak earnings news out of Amazon.com, Ford and Microsoft, provided another catalyst for investors to sell, said Ryan Detrick, senior technical analyst at Schaeffer's Investment Research.
The selling—which came from big institutions—was taking place amid significant volume, indicating more conviction in the moves, Detrick said.
"Egypt is definitely at the forefront today," agreed Paul Brigandi, senior vice president of portfolio management at Direxion Funds/Direxion Shares. "Overall, political unrest is never good for the market, especially when it has to do with the Middle East."
But the events in Egypt hit at a time when the market was bumping up against psychologically important benchmarks, and was beginning to "look fatigued" after rallying for some eight or nine weeks, said Brigandi, noting that the S&P 500 had been up 3 percent so far this year on top of a nearly 13 percent gain in 2010.
"The general consensus in the market is that a pullback was expected," Brigandi said. "And seeing a headline like this is giving people reason to believe this and sell risky assets."
In fact, many of the sectors that had outperformed in 2010—including the riskiest assets, such as small caps and emerging markets—fell the most on Friday. The Russell 2000 Small-Cap Index, for instance, slumped 2.5 percent.