Brutal selloff on Wall Street

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NEW YORK (CNNMoney.com) -- Stocks tanked Friday, with the Dow shedding over 250 points, after a weaker-than-expected December jobs report exacerbated recession fears.

The Dow Jones industrial average (INDU) tumbled almost 2 percent. The broader S&P 500 (INX) index lost around 2.5 percent. The Russell 2000 (RUT.X) small-cap index fell 3.2 percent.

The Nasdaq (COMPX) composite lost 3.8 percent, or just over 98 points. According to Stock Trader's Almanac, it was the tech-heavy index's biggest one-day point loss since Sept. 17, 2001, the first day the market reopened for trading after having been closed in the aftermath of 9/11. On that day, the Nasdaq lost 115.83 points.

A weaker-than-expected unemployment rate sparked a big stock selloff. Bonds rallied, as investors sought safety and the dollar fell versus other major currencies. Oil and gold prices retreated from recent records.

Employers added 18,000 jobs to their payrolls last month, short of forecasts for 70,000 and down from a revised 115,000 in the previous month. The 18,000 figure marked the weakest monthly jobs growth since August 2003. (Full story).

The unemployment rate, generated by a separate survey, rose to 5 percent - a more than two-year low - from 4.7 percent in the previous month. Economists thought it would rise to 4.8 percent.

Average hourly earnings, the report's inflation component, rose 0.4 percent after rising a revised 0.4 percent in the previous month. Economists thought wages would rise 0.3 percent.

Stocks have been volatile for months as investors have mulled the fallout from the housing and credit market crises, and worried that the economy could be heading into recession.

The weak labor market report amplified those worries.

"In September, October and November we saw pretty solid payroll numbers, indicating that although the economy was in a bit of a slowdown, the jobs market was holding up, giving us some sort of floor," said Georges Yared, chief investment strategist at Yared Investment Research. "That floor was pulled out from under us this morning."

In the next few months, investors will be looking to see if the December employment report was a temporary indication or the start of a longer-term downtrend for the labor market.

"Jobs growth in the month was moribund and we should expect it to be moribund for a while," said Brett Hammond, chief investment strategist at TIAA-CREF. "But I think we shouldn't get too overwhelmed by the notion of a recession yet."

He said that economic growth prospects look to pick up in the second half of the year, and that by that point the housing issues will be "through the trough," although the woes for that sector won't be over yet.

In the short-term, investors will be looking to see how the Dec. jobs report impacts near-term Federal Reserve policy, with bets now rising that the central bank could cut rates more aggressively, perhaps at the next meeting on Jan. 29 and 30. (Full story)

The Federal Reserve announced Friday that it will lend up to $60 billion this month to banks through its new auction process as a means of easing the credit crunch.

Treasury prices climbed, as investors sought safety in the comparably less risky government debt. The rise lowered the yield on the 10-year note to 3.84 percent from 3.89 percent late Thursday. Treasury prices and yields move in opposite directions.

In currency trading, the dollar slipped versus the yen and the euro.

U.S. light crude oil for February fell $1.27 to settle at $97.91 a barrel on the New York Mercantile Exchange, after hitting a record trading high above $100 a barrel during Thursday's session.

COMEX gold for February delivery fell $3.40 to settle at $869.10 an ounce, pulling back from an all-time high hit Wednesday.

Stock declines were broad based, with 29 out of 30 Dow components falling, led by tech stocks such as Intel (INTC, Fortune 500), IBM (IBM, Fortune 500) and Hewlett-Packard (HPQ, Fortune 500) and financial companies such as Citigroup (C, Fortune 500) and JP Morgan Chase (JPM, Fortune 500).

Intel's decline followed a JP Morgan downgrade to "neutral" from "overweight." Separately, the chipmaker said it is pulling out of the One Laptop Per Child program.

Intel also trades on the Nasdaq and was among the 96 components of the Nasdaq 100 that fell on the session.

A slew of retail stocks fell on concerns that weaker job growth will slam consumer spending. The S&P Retail index lost nearly 4 percent.

Market breadth was negative. On the New York Stock Exchange, losers topped winners by more than three to one on volume of 1.26 billion shares. On the Nasdaq, decliners beat advancers four to one as 2.07 billion shares changed hands.

In other economic news, the Institute for Supply Management's reading on the services sector showed a smaller monthly decline than economists had been expecting. (Full story).

Wall Street also considered the results from Thursday's Iowa caucuses, which kicked off the 2008 presidential election. Former Arkansas Gov. Mike Huckabee won on the Republican side and Sen. Barack Obama of Illinois won for the Democrats.

Stocks were mixed Thursday as a jump in factory orders helped temper concerns about inflation as oil and gold prices hit record highs.