Dow drops over 200 points

NEW YORK (CNNMoney.com) -- Stocks fell sharply Friday, with the Dow ending over 200 points lower, as mortgage-induced losses at Wachovia and Fannie Mae riled traders already nervous that the woes could spread to the wider economy.

The 30-share Dow Jones industrial average (Charts) lost about 1.7 percent and the broader S&P 500 index (Charts) fell 1.4 percent.

The tech-fueled Nasdaq (Charts) got hammered, tumbling 2.5 percent.

"It got pretty ugly," said Alec Young, an equity strategist at Standard and Poor's Equity Research. "There's just an unprecedented number of negatives coming at the market."

Those negatives include the triple threat of restricted access to credit, a downturn in the housing sector and near record oil prices, said Young.

"People are more and more worried about recession," he said.

For the week, the Dow lost 4.1 percent, while the S&P fell 3.7 percent. The Nasdaq was the biggest loser, dropping 6.9 percent.

Here's what moved markets on Friday:

Wachovia (Charts, Fortune 500), the nation's fourth-largest bank, said this morning the complex debt instruments it held in its portfolio declined in value by an estimated $1.1 billion before taxes in October, leading to a $600 million loan-loss charge for the current quarter. The bank had reported $1.3 billion in pre-tax losses in the third quarter tied to pools of debt backed by home loans.

Fannie Mae (Charts), the largest buyer and backer of home loans in the country, said Friday its profits fell by half over the last nine months.

The government-sponsored company said it earned $1.17 a share from January through September, down from $3.5 billion, or $3.16 a share, in the same period last year. Its shares fell more than 6 percent.

Stocks have sold off as traders worried about the wider economic impact of losses at financial companies and the growing ranks of consumers saddled with expensive mortgages and high energy bills.

"The fear is spreading," said Joe Battipaglia, chief investment officer at Ryan Beck & Co. "Investors think profits may have hit their peak, not just in finacials but across other sectors of the economy."

The losses from Wachovia and Fannie come after Citigroup (Charts, Fortune 500) said last week it expects to write down a further $8 billion to $11 billion in the fourth quarter due to credit- and mortgage-related problems. Citigroup and warnings of more write downs from other banks caused the Dow to lose 362 points last week.

On Wednesday, the Dow posted one of its biggest single-day declines, falling 361 points on further credit market fears.

In recent months, banks and other financial institutions have taken big losses on mortgage-backed securities, which package individual home loans and sell them as an investment.

Those investments soured when people started defaulting on loans because of the decline in the real estate market, which ended their hopes of refinancing on the back of rising home values.

Adding to investor woes was a weak growth forecast from the 27-nation European Union, which said growth is expected to slow to 2.4 percent next year and in 2009, down from 2.9 percent this year. The EU attributed weaker growth to problems stemming from the subprime mess in the United States and the increase in oil prices.

The University of Michigan report on consumer sentiment came in well below estimates but did little to move markets.

A bit of positive news: The U.S. trade deficit fell to the lowest level in 28 months as a falling dollar helped boost exports.

Among stocks in the news Friday, Merck (Charts, Fortune 500) announced it will pay $4.85 billion to resolve most of the 27,000 claims involving its blockbuster pain medication Vioxx. Merck shares climbed nearly 4 percent.

Disney (Charts, Fortune 500) reported earnings that beat expectations on sales that were roughly in line with analysts' estimates.

Clearwire (Charts) and Sprint Nextel (Charts, Fortune 500) said they ended an earlier agreement to build a high-speed wireless network.

Meanwhile, oil prices resumed their assault on $100 a barrel. U.S. light crude for December delivery rose 86 cents to settle at $96.32 a barrel on the New York Mercantile Exchange.

The dollar fell against the euro but rose slightly against the yen. Treasury prices rose, with the yield on the benchmark 10-year note falling to 4.22 percent. Bond prices and yields move in opposite directions.

Major markets in Asia and Europe finished lower on mounting credit fears.

Market breadth was negative. Losers topped winners by 2 to 1 on the New York Stock Exchange as 1.35 billion shares traded hands. Decliners beat advancers by 2 to 1 on volume of 2.32 billion shares.

COMEX gold lost $2.80 to settle at $834.70 an ounce.