Stocks finish a dismal week

NEW YORK (CNNMoney.com) -- Stocks sold off big Friday, with the Dow industrials sliding more than 176 points, as subprime woes reemerged and investors remained nervous over rising interest rates.

Traders also said stock transfers from some major indexes were keeping investors on the sidelines.

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The 30-share Dow (down 185.58 to 13,360.26, Charts) sank about 1.4 percent. The broader S&P 500 (down 19.63 to 1,502.56, Charts) also lost about 1.3 percent, while the tech-laden Nasdaq (down 28.00 to 2,588.96, Charts) fell roughly 1.1 percent.

For the week, the Dow and S&P both lost about 2 percent, while the Nasdaq shed 1.4 percent.

The dollar hit a 4-1/2-year high against the yen, oil rose, and bonds mounted a mini-rally on a flight to quality.

The Federal Reserve meets next week and is set to issue the latest decision on interest rates Thursday. Most analysts expect the Fed's key lending rate to remain unchanged at 5.25 percent.

Next week is also fairly heavy with economic reports, including existing home sales on Monday, consumer confidence and new home sales Tuesday, a final reading on GDP Wednesday, and personal income and spending Thursday.

While the Fed meeting is expected to be the most widely watched event, further trouble in the subprime lending sector could upstage a decision on rates, said Jim Awad, Chairman of Awad Asset Management.

In addition, rumors about more hedge fund problems were hurting the market, according to Todd Clark, director of stock trading at Nollenberger Capital Partners in San Francisco.

"People think there might be another hedge fund that might be in trouble," said Clark.

The rumors came after two Bear Stearns hedge funds nearly folded earlier this week, apparently stung by bad deals in the subprime lending sector. Bear Sterns said Friday that it's bailing out one fund to the tune of $3.2 billion, and is still working on a rescue plan for the other.

News of the bailout spooked investors.

"This is not over yet," said Awad. "We don't know who's involved, who's not. The whole recovery has been built of confidence, leverage and cheap money. This has the potential to be widespread in terms of seizing up capital."

Traders also said the Russell Indexes were rebalancing their listings, adding some new stocks and removing others, and investors were waiting to see what the new indexes will look like.

Private equity firm Blackstone (up $0.00 to $35.06, Charts) debuted on the New York Stock Exchange at $36.45 a share, about an 18 percent premium over the price underwriters paid for the stock Thursday. The stock ended 13 percent higher

Blackstone priced 133.33 million shares at $31 a share Thursday to raise $4.13 billion. If underwriters exercise an option to to buy an additional 20 million shares, the total offering would be boosted to $4.75 billion, making it the largest U.S. IPO in five years and the sixth largest ever.

But the IPO action didn't do much for the broader market, which had no major economic news to trade on Friday and is still reeling from nervousness about rising interest rates.

After beginning lower, Treasury prices actually moved higher Friday, lowering the yield on the 10-year note to 5.14 percent. Bond prices and yields move in opposite directions.

But one trader blamed Friday's depressed market on lingering concern over higher interest rates.

"People might not want to be long going into the weekend," said Jay Suskind, co-head of capital markets at Florham Park, N.J.-based brokerage Ryan Beck & Co. "The market has been quite volatile in the last few weeks, based on interest rates and inflation and stuff like that."

Treasury yields have jumped in recent weeks on concerns over rising rates and inflation worldwide, especially in red hot economies such as China.

Investors have worried that higher rates could further damage the already battered housing market and crimp consumer spending. On top of that, a rate increase could slow corporate borrowing, which has fueled much of the recent merger and buyout activity that's helped lift stocks this year.

In corporate news, BP (Charts), facing pressure from the Kremlin, is close to a deal that would give up its holdings in a $20 billion Russian natural-gas project to state-controlled gas monopoly Gazprom, according to a report in The Wall Street Journal.

Standard & Poor's announced late Thursday that three companies being spun off from Fortune 500 companies would join that benchmark index, displacing three other companies. Two of the spinoffs will come from conglomerate Tyco (Charts) - Covidien, its maker of medical devices and supplies and electronics, while credit card issuer Discover Financial will be spun off from Morgan Stanley (Charts, Fortune 500).

The announcement hit the stocks of the three companies that will be dropped from the index, Sanmina-SCI (down $0.02 to $3.39, Charts, Fortune 500), PMC-Sierra (down $0.39 to $7.75, Charts) and ADC Telecommunications (down $0.60 to $18.54, Charts), which all saw their their shares fall in Friday trading.

The dollar rallied against the yen as investors exited low-yield holdings in the Japanese currency. But the dollar fell against the euro.

Oil prices rose as talks failed between the Nigerian government and labor union officials aimed at ending a general strike in Africa's largest oil exporter. U.S. light crude gained 50 cents to $69.15 a barrel.

European shares finished down. Markets in Asia ended mostly lower, although Hong Kong shares rallied.

Market breadth was negative. On the New York Stock Exchange, losers beat winners three to one on volume of 1.23 billion shares. On the Nasdaq, decliners topped advancers by a margin of over two to one on volume of 1.51 billion shares.