Stocks Decline Amid Lehman Jitters

Stocks declined Friday amid uncertainty surrounding Lehman Brothers and as the government's reading on retail sales missed its mark.

The Dow Jones Industrial Average opened down about 60 points, then doubled that slide, before paring back to the 60-point drop. Two-thirds of the Dow 30 stocks were lower. (Track the Dow winners & losers.)

The S&P 500 and Nasdaq were also lower.

Retail sales fell 0.3 percent, when economists had expected a 0.2-percent rise amid a drop in gasoline prices and weak consumer spending. Excluding autos, sales were off 0.7 percent, lower than the 0.2-percent drop expected.

In other economic news: Producer prices fell 0.9 percentin August, nearly double the 0.5-percent decline expected, but core prices rose 0.2 percent, as expected. Consumer sentiment hit an eight-month highin a mid-August reading, blowing past expectations, amid relief over lower gasoline prices. Business inventories increased by 1.1 percent in July, the highest in more than four years and more than double of what was expected, as auto inventories ballooned.

Also weighing on the market was crude oil's climb toward $102 a barrel as Hurricane Ike barreled toward the Texas Gulf Coast.

Financials were the primary source of discontent.

"Bear Stearns was supposed to end it. … Now they’re talking about Lehman," Art Cashin, director of floor operations at UBS Financial, told CNBC. "With no deal when the Asian markets opened, people think the negotiations are going to be pushed into the weekend to give them a couple of more hours to look at things. And already, they’re looking for the next rumor-monger victim behind Lehman."

"The frustration is palpable," Cashin said. The real problem is that "everybody’s got to be very careful with their words. Because, even if somebody’s in reasonably good condition, you can cause a run on a bank … This is a very dangerous business," Cashin said.

The market breathed a sigh of disappointment as 6 a.m. ET came and went with nary an announcement from Lehman Brothers.

Lehman Brothers shares dropped 10 percent at the open, after gaining as much as 25 percent premarket amid hopes of a buyout.

The investment bank is still actively working toward finding a buyer, with several big names being bandied about including Barclays, Bank of America and HSBC. Company officials are trying to get a deal wrapped up and announced by Sunday night, people close to the deal tell CNBC.

Officials from the Federal Reserve and the Treasury are involved in the negotiations, these people say, but as of right now, there are no plans for the government to provide financial assistance to facilitate a purchase of Lehman in the way that the Federal Reserve provided a backstop to JPMorgan Chase when the brokerage agreed to purchase Bear Stearns in March.

(What will happen to the market if Lehman fails? Click on the video at left.)

U.S. Treasury Secretary Henry Paulson is "adamant" that no government money be used in any Lehman deal, sources familiar with the situation said.

Meanwhile, Ladenburg Thalmann's analyst Richard Bove said Bank of America is likely to win the auction for Lehman Brothers as it is a "natural fit."

Washington Mutual shares skidded more than 8 percent, then popped into positive territory, after Moody's downgraded it to "junk" status following the bank's announcement that it would add $4.5 billion to its loan-loss reserves. The stock has lost more than 92 percent of its value in the past 52 weeks.

Among other financials in traders' crosshairs today were AIG , which plummeted 15 percent, making it the biggest drag on the Dow and S&P, and Merrill Lynch, which tumbled 10 percent.

General Motors jumped another 10 percent, making it once again the Dow's top performer, amid increasing optimism that the federal government will provide loans to U.S. auto makers to ease liquidity concerns.

GM shares are up nearly 40 percent since they hit $10 at the end of August. Shares of rival Ford are up roughly 14 percent in that amount of time.