The major indexes had fluctuated in a narrow range after Thursday's 419-point plunge in the Dow Jones industrial average. There was little news to help investors determine their next moves. But some traders did not want to take the chance of holding stocks if one of their biggest concerns, the European debt situation, worsened over the weekend.
"These things usually break out over the weekend and then you have a mad dash Monday to react to them," said Mike McGervey, the head of McGervey Wealth Management.
The drop late in the day recalled the 2008 financial crisis. Then, many investors stepped up their selling on Friday afternoons out of fears that another bank might fail over the weekend - as Lehman Brothers did on Sunday, Sept. 15.
The Dow fell 125 points, or 1.1 percent, to 10,864 in late afternoon trading. The Dow had been down 51 points at midday.
The Standard & Poor's 500 index lost 12, or 1.1 percent, to 1,127. The Nasdaq composite index dropped 28, or 1.2 percent, to 2,351.
The Dow's drop was due in part to Hewlett-Packard Co., which plunged 21 percent. The company said Thursday that it will close its mobile business, sell or spin off its PC business and pay $10 billion for a business software company.
The most notable economic news Friday came from JPMorgan Chase & Co. The bank joined other financial firms and cut its forecast for economic growth during the fourth quarter. It's now predicting growth of 1 percent, down from an earlier forecast of 2.5 percent.
The yield on the benchmark 10-year Treasury note rose to 2.08 percent from late Thursday's 2.06 percent. It had been up to 2.11 percent earlier in the day. The yield fell below 2 percent Thursday for the first time as heavy demand sent its price sharply higher.
Overseas stock markets had larger drops than in the U.S. European banking stocks fell near two-and-a-half-year lows, dragged down by rumors about banks' potential losses on bonds issued by heavily-indebted governments. The selling in the U.S. has come in part because of fears that U.S. banks would be hurt if European countries default on their debt. Another concern: weakening European economies will hurt growth in the U.S.
Earlier Friday, Asian shares fell sharply, with major indexes in China and Japan losing more than 2.5 percent. However, some of those losses reflected selling in response to the drop in the U.S. Thursday.
As the selling continued overseas, gold rose as high as $1,881 an ounce. Oil prices fell as traders feared a global slowdown that would cut demand for crude.
A possible recession remains the focus of the markets. A recession is traditionally thought of as two consecutive quarters of negative economic growth, measured by a country's gross domestic product. With expectations of growth in the U.S. already low, investors worry that the economy can't withstand another unexpected event like the earthquake in Japan or the string of bad weather that ravaged the South earlier this year.
JPMorgan analyst Michael Feroli said Friday that business sentiment, household wealth and global growth all look worse than just a few weeks earlier. That will keep economic growth nearly flat in the first quarter of 2012, he said.
On Thursday, economists with Morgan Stanley said that the U.S. and Europe are "dangerously close to recession," adding, "it won't take much in the form of additional shocks to tip the balance."
The market's failure to bounce back Friday from Thursday's rout is making investors even more wary, said Kevin Dorwin, managing principal with Bingham Osborn & Scoarborough LLC in San Francisco.
"There's just nothing to inspire investors to take on more risk, and until that happens, the markets are just going to bounce around like a pingpong ball," he said.
Stocks also fell Thursday on news of another drop in home sales, weaker manufacturing in the mid-Atlantic states and a jump in inflation at the consumer level to its highest level since March. There also was bad news on the job market: an increase in the number of people who applied for unemployment benefits.
Thursday's numbers joined a series of reports pointing to a slowing economy. The government reported on July 29 that growth in the first half was much weaker than expected - and that the economy barely grew in the first quarter. Since then, the combination of disappointing numbers in the U.S. and worries about Europe's debt problems have set off waves of selling.
The Dow is down 13.6 percent since stocks began falling on July 21. That has drained billions from American's retirement savings and other investment accounts. And the stock market's drop can itself help move the country toward recession.