NEW YORK (CNN/Money) - Stocks fell for the second week in a row, closing sharply lower Friday, as investors dumped shares ahead of the weekend on the belief that the potential for war with Iraq is rising.

European and Asian markets were hit hard, too, as was the dollar versus other currencies. Bond prices and gold surged in a typical flight-to-quality and on the war fears. Crude oil prices gained as well on concerns that a war with Iraq could disrupt exports.

Market action in the coming week is expected to remain focused on the global picture.

On Monday, U.N. weapons inspectors will report on their findings in Iraq to the U.N. Security Council. On Tuesday, President Bush will share his views in his "State of the Union" speech.

Although the Bush administration has said that Iraq must disarm or face repercussions, they have also stated that war is a last resort, particularly amid the recent public criticism about a potential war by some of the U.S.'s allies in Europe and Russia.

While Monday's report is seen as key, the Bush administration may end up allowing weapons inspectors more time in Iraq, a senior U.S. official said Friday, according to published reports. (For the latest developments surrounding Iraq, click here.)

On Monday, investors will take in profit reports from Dow component American Express. Later in the week, reports are expected from AOL Time Warner, Boeing, Duke Energy, DuPont, Exxon Mobil, Honeywell, International Paper, Merck, Novellus, Philip Morris, Procter & Gamble, SBC Communications, UPS, Walt Disney and Xerox.

Economic reports are expected regarding consumer confidence, existing and new home sales, durable goods orders, the first reading on fourth-quarter gross domestic product, personal income and spending and the revised reading on the University of Michigan's consumer sentiment index.

And Tuesday and Wednesday the Federal Reserve will hold its interest-rate-setting meeting.

On Friday, the Nasdaq composite (down 46.13 to 1342.14, Charts) lost 3.3 percent, while the S&P 500 (down 25.94 to 861.40, Charts) and the Dow Jones industrial average (down 238.46 to 8131.01, Charts) both lost just under 3 percent. The Dow Transportation index (down 67.44 to 2163.33, Charts) also lost 3 percent.

On the week, the Dow lost 5.3 percent, or around 455 points, its worst weekly point loss in six months. The decline set it back to levels not seen since mid-October.

The Nasdaq gave back 2.5 percent, or 40 points, on the week, while the S&P lost 4.5 percent, or 40 points, for the week.

The Nasdaq on Friday joined the Dow and the S&P 500 in erasing all of its gains for 2003.

The selling was fairly broad-based, with blue chips on the Dow and technology shares on the Nasdaq all getting hit. All 30 of the issues that comprise the Dow industrials lost value.

Anxiety and caution ahead of a week full of significant political and economic events led investors to shrink their stock holdings going into the weekend, putting money into the comparatively safer havens of bonds and gold.

"There's big fear. People are selling because they don't know what's going to happen. The news out of the BBC this morning that Iraq is getting ready for chemical warfare is a big part of it," said Peter Green, market analyst at MKM Partners.

Among the latest developments internationally, Spanish officials arrested 16 suspected terrorists who were reportedly preparing for attacks in Europe with chemical and explosive materials.

"You've got the Dow transports crushed, gold is up, the insurers are down and the high techs are really tanking," MKM's Green added.

Bonds were higher, with the yield on the 10-year note at 3.92 percent after a 2/32 of a point gain in price. The price of gold surged $3.70 to $368.40 an ounce in New York.

Also amid the war talk, light crude oil futures for March delivery added $1.03 to settle at $33.28 a barrel in New York, while the dollar was notably lower versus both the yen and euro.

"I think it's all Iraq. [Chief U.N. weapons inspector] Hans Blix is giving his report Monday, Bush is giving his State of the Union address Tuesday and I've got every customer telling me that they don't want to be long ahead of that," said Brian Finnerty, managing director at Melhado, Flynn & Associates.

All of this, coupled with what appears to be a growing distaste for U.S. holdings among international investors (as evidenced by the weakening dollar), has left the stock market shaky and unable to capitalize on a largely strong earnings season for corporate America.

"Without the overhang of war, I think we'd absolutely be up right now," added Melhado, Flynn's Finnerty. "The economic picture is improving, the corporate profit front is good. You're seeing very good numbers in a bunch of sectors. Look at software -- Microsoft, Oracle, BMC Software all said good things. But the market is just absolutely ignoring that."

Still, the good earnings news continued to flow and select stocks did benefit from some strong results. Among the gainers, Amazon.com (AMZN: up $0.32 to $22.11, Research, Estimates), profitable only for the second time in its life, climbed a little over 1 percent.

Fellow Seattle company Starbucks (SBUX: up $2.93 to $22.95, Research, Estimates) soared more than 14 percent after it reported better-than-expected earnings and raised its bottom-line forecast for the rest of the year.

But on the downside, JDS Uniphase (JDSU: Research, Estimates) reported a loss late Thursday of 13 cents per share in its latest quarter, 8 cents worse than analysts expected. One year earlier, it lost 2 cents. The stock lost 5 percent of its value and was one of the 10 most actively traded Nasdaq issues.

Utilities were also much weaker. CMS Energy warned that it would post a large loss when it reports full-year 2002 results due to asset write-downs and said it would halt its dividend because it needs the cash. Shares of CMS (CMS: down $2.47 to $6.07, Research, Estimates) lost more than 29 percent. American Electric Power (AEP: down $1.24 to $25.65, Research, Estimates) shares declined after the company missed fourth-quarter results and warned that 2003 results won't meet estimates.

(For a roundup of all of the day's earnings news, click here.)

Market breadth was firmly negative. On the New York Stock Exchange, losers outnumbered gainers by almost 3 to 1 as 1.51 billion shares traded. On the Nasdaq, declining issues also led advancers by almost 3 to 1 as 1.55 billion shares changed hands.