Stocks plunged as the sharpest jump in the unemployment rate in more than 20 years and rocketing oil prices sparked concerns about stagflation.
The Dow Jones Industrial Average closed at its session low, down 394.64, or 3.1 percent, at 12209.81. The S&P 500 and Nasdaq also lost more than 3 percent.
"Short term, the market is very emotional," Jim Huguet, of Great Companies, told CNBC. "The only good news is they rang the bell at four o'clock."
The sell-off was severe enough to erase all of the prior session's rally and then some, leaving the Dow down nearly 430 points, or 3.4 percent, for the week.
This is likely the beginning of capitulation, said Bruce McCain, head of investment strategy at Key Private Bank in Cleveland.
"I think we were in a mood to be disappointed," McCain said. "That's part of the process."
As the market tests March lows, some analysts suggest the market is ripe for bargain hunting.
"History dictates that the seeds of the next bull market are being planted right now. It's very often that first leg up will come amid a gloomy data scenario," said Quincy Krosby, chief investment strategist at The Hartford.
Light, sweet crude oil was on another tear, soaring more than $11 a barrel and smashing the prior session's record jump of $5.49. Crude ended Friday at $138.54 a barrel, putting it up more than $11 for the week -- its biggest weekly gain on record -- and up a whopping 44 percent since the start of the year.
The commodity was still reeling from comments from the ECB president that the central bank might raise European interest rates, as well as remarks from Israel's transport minister that an attack on Iranian nuclear sites appears "unavoidable" and a Morgan Stanley note that oil could hit $150 by the Fourth of July.
AIG and American Express were the top decliners on the Dow. Chevron had been the lone star rising on the Dow for most of the day, but even that light went out by the closing bell and all 30 Dow stocks finished lower.
For the week, Hewlett-Packard and Verizon were the best performers on the Dow as early cyclicals such as technology are getting more play and on news this week that Verizon plans to buy Alltel, creating the largest wireless carrier in the U.S., eclipsing AT&T .
Not surprisingly, Bank of America and AIG were the worst Dow performers this week.
Financials took it on the chin this week, with bond insurers Ambac and MBIA losing more than 20 percent for the week after S&P cut its triple-A credit ratings on the firms and other ratings agencies threatened to do the same.
Traders cranked up the volume on chatter about Lehman Brothers this week, with rumors swirling that the firm had visited the Fed's stigmatized discount window -- which the firm denied -- and that it was scrambling to raise more capital, maybe even looking for overseas partners.
Executives, tired of the noise, are mulling a pre-announcement of the firm's second-quarter results in an effort to dispel market rumors that it is facing a liquidity crisis, people close to the investment bank told CNBC.
Lehman has traditionally released its earnings for the second quarter during the week of June 16, which is in two weeks. But people close to the company said the firm is considering bumping it up to next week, when earnings are also expected from Morgan Stanley and Goldman Sachs .
Wachovia and Washington Mutual each lost more than 15 percent for the week after the banks ousted their CEOs.
Among the week's other news, traders cheered stronger-than-expected same-store sales reports from Wal-Mart and Costco , and General Motors announced plans to shutter four North American truck plants as auto makers grapple with trickling demand for gas-guzzling SUVs and trucks.
Of course, the week's big, gong-crashing finale was the May jobs report, which sent a shock wave through the market.
The employment report showed that U.S. employers cut jobs for a fifth straight month. Nonfarm payrolls shed 49,000 jobsin May, while the unemployment rate shot up to 5.5 percent from 5 percent in April, the biggest monthly jump since 1986.
Despite the market's knee-jerk, economists said the historically high jump in the unemployment rate was likely a statistical fluke as more teens and college graduates flooding the job market.
Still, the report "is further evidence of the increasing pressure on consumer spending, which is likely to revert to a very weak trend after the temporary benefit of tax rebates fades," Joshua Shapiro, chief U.S. economist at MFR Inc. wrote in a note to clients.
"The biggest let-down is the unemployment rate because now (Fed Chairman) Bernanke's hands are tied," Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams, told Reuters. "If Bernanke raises rates to fight inflation, he's going to really slow down the economy. But if he doesn't raise rates the dollar is going to go weak and that's why oil is going through the roof."
In other market action Friday:
National Semiconductor shares jumped 4.8 percent-- a rare feat on this landslide day -- after the chip maker reported a lower quarterly profit but blew past revenue expectations amid higher profit margins on its chips.
"Business conditions improved in the quarter and we were able to turn this into higher gross margins," CEO Brian Halla said in a statement.
Intel tumbled 4.1 percent amid news that the chip maker is under investigation by the FTCfor antitrust violations.
In the financial sector, the Securities and Exchange Commission is investigating whether AIG overstated the value of contracts linked to subprime mortgages, according to a report in the Wall Street Journal. AIG shares skidded 6.8 percent.
Amazon dropped 4.6 percent after the online retailer's Web site was rattled by a technical failurethat cut access to the site in some cities for more than an hour.
On the Micro-hoo front, Carl Icahn sent yet another letter to Yahoo , trying to get the Internet portal to agree to a deal with Microsoft . Icahn said Yahoo should pitch a $34.375-a-share price tag to Microsoft and if the software giant doesn't accept the offer in a "friendly and cooperative" manner, he would push for a Yahoo deal with Google .
Yahoo's shareholders don't meet until August 1, so this could go on for quite a while.
Send comments to cindy.perman@nbcuni.com.