Stocks slumped nearly 1 percent on Friday, but closed off the worst levels of the session, after a Republican plan to avert the "fiscal cliff" fell apart, raising fears a deal will not be reached before the end of the year.
The Dow Jones Industrial Average lost 120.88 points, or 0.91 percent, led by losses in shares of Bank of America and Disney. At its worst levels, the Dow was down 189 points. American Express and McDonald's posted gains.
The dropped 13.54 points, or 0.94 percent, while the Nasdaq fell 29.38 points, or 0.96 percent. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, climbed toward 18.
Among S&P sectors, energy and financials were the worst performers.
All the major averages still finished higher for the week. The S&P 500 gained 1.2 percent, the Dow rose 0.4 percent and the Nasdaq was up 1.7 percent.
House Speaker Boehner said in a press conference this morning that the failure to vote on "Plan B" to avert the automatic tax increases and spending cuts that go into effect at the end of the year was not the outcome he wanted.
"Unless the President and Congress take action," Boehner said, "tax rates will go up on every American taxpayer and devastating defense cuts will go into effect in 10 days." The Speaker did leave the door open to working with Democrats.
With time running short to find a solution before Christmas, the White House said it would work with Congress to avoid the fiscal cliff. President Barack Obama said he was hopeful a deal can be reached quickly.
"The risk is very much to the downside here and certainly what we've seen over the last 24 hours is the political partisanship in Washington marches on," Katie Nixon, Northern Trust's wealth management CIO, told CNBC on Friday. "The optimism around any kind of a grand bargain has dissipated."
If politicians cannot forge a deal before the end of the year, there is a risk that the roughly $600 billion in spending cuts and tax increases could tip the U.S. economy back into recession. (Read More: El-Erian: Recession Is Now More Likely)
Barry Knapp, head of U.S. equity portfolio strategy at Barclays, said he thought the market was vulnerable to selling pressure even in a best case scenario. "Between now and when we finally get something done, we should be at 1,325 or 1,300 on the S&P," he told CNBC Friday.
The fiscal cliff wrangling overshadowed some better-than-anticipated economic data. November personal income rose 0.6 percent while spending increased 0.4 percent. The University of Michigan Consumer Sentiment survey for December came in at 72.9. Durable orders data for November, meanwhile, rose 0.7 percent.
Research In Motion shares tumbled 22 percent after reporting a drop in subscriber rolls for the first time in its history. It also worried investors during a conference call in saying it plans to alter its service revenue model. CEO Thorsten Heins told CNBC that worries about falling service revenue during the transition to BlackBerry 10 are unfounded.
Micron lost $0.27 per share in the fiscal first quarter, seven cents wider than analysts had anticipated. Revenue also came in below consensus, as the chipmaker suffered the effects of slowing personal computer sales and overall economic uncertainty.
Red Hat reported third-quarter profit of $0.29 per share, in line with estimates, with revenue exceeding estimates. The provider of Linux software saw strong growth in its subscription business.
Nike earned $1.14 per share for its second quarter, 14 cents above estimates, with revenue in line with estimates. Gross margin fell for the eighth straight quarter, but that streak could end soon based on the athletic footwear and apparel maker's current financial projections.
Drugstore chain Walgreen reported a fiscal first-quarter profit of $0.58 per share, excluding certain items, well below estimates of $0.70. Revenue also was slightly short of estimates. Walgreen said non-operational factors weighed on results, but the underlying business remains strong.
Finally, shares of Yum Brands fell on food safety concerns in China. In a statement, Chinese regulators said that Yum's KFC was supplied with chicken that contained excessive amounts of antibiotics. Yum said in a regulatory filing it was cooperating with the government and that the two suppliers in question represent an "extremely small percentage" of product to KFC.
—By CNBC.com's Justin Menza
Coming Up Next Week:
Monday: Market closes at 1 p.m. ET
TUESDAY: Markets closed for Christmas
WEDNESDAY: Weekly mortgage applications, Case-Shiller home price index, Richmond Fed mfg index
THURSDAY: Jobless claims, new home sales, consumer confidence, oil inventories, Kansas City Fed survey, Fed balance sheet, money supply
FRIDAY: Chicago PMI, pending home sales, natural gas inventories
More From CNBC.com: