Recession fears slam stocks

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A bearish start to the session with oil around $103 and the U.S. dollar hitting another record low against the euro. Play video

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NEW YORK (CNNMoney.com) -- Stocks tumbled Friday morning after AIG's record loss and weak readings on manufacturing and consumer sentiment revived recession fears.

Adding to the downbeat sentiment were record-high oil prices, the slumping dollar and reports that a rescue of bond insurer Ambac has hit some roadblocks.

Roughly two hours into the session, the Dow Jones industrial average (INDU), the broader Standard & Poor's 500 (SPX) index and the Nasdaq composite (COMP) all fell at least 1.7%.

AIG (AIG, Fortune 500) reported a steep $5.3 billion quarterly loss after the market close Thursday and said it took an $11 billion writedown related to big losses in investments tied to bad mortgage bets. Shares of the Dow component tumbled 7% Friday.

Also late Thursday, Dell (DELL, Fortune 500) reported quarterly profit that fell from a year ago and missed estimates, due to a number of charges it took in the quarter. The company was also cautious on its outlook, saying it was seeing some large customers holding back on purchases. Shares dipped 1.5% Friday.

CNBC reported that a proposed bailout of troubled bond insurer Ambac Financial has hit some significant snags, sending Ambac (ABK) shares 7.5% lower and adding to economic worries.

Meanwhile, investor Wilbur Ross said he was injecting up to $1 billion in bond insurer Assured Guaranty (AGO), whose stock climbed 14%.

Economic news mostly negative. The Chicago PMI, a report on manufacturing in the Midwest, fell more than expected, falling to 44.5 in February from 51.5 in the previous month, a more than six-year low. Economists thought it would fall to 49.5. Any number below 50 indicates weakness in the sector.

The University of Michigan's consumer sentiment index was revised up slightly to 70.8 in February from an earlier read of 69.6, the lowest level since the early 1990s. Sentiment stood at 78 in January.

Both personal income and personal spending rose more than expected in January, the Commerce Department reported. But the report pointed to signs of inflation pressure.

Income rose 0.3% after rising 0.5% in December. Economists surveyed by Briefing.com thought income would rise 0.2%. Spending rose 0.4% after rising 0.3% in December, versus expectations for a rise of 0.2%.

Core PCE, the report's inflation component, rose 0.3%, as expected, after rising 0.2% in December. But the measure, which tracks prices paid by consumers for goods other than food and energy, rose 2.2% versus a year ago. That's above the 1% to 2% range for that indicator that the Federal Reserve is said to prefer.

The Fed has cut interest rates steadily since September, leaving the fed funds rate, a key bank lending rate, at 3%. Wall Streeters expect the bank to cut rates by another half-percentage point at the upcoming meeting on March 18.

However, in recent congressional testimony, Fed Chairman Ben Bernanke indicated that rising inflation was making it harder for the Fed to continue cutting rates to stimulate the sluggish economy.

On the move. Stocks declines were broad based, with all 30 Dow components sliding, led by AIG. Other big losers included Citigroup (C, Fortune 500), JP Morgan (JPM, Fortune 500) and American Express (AXP, Fortune 500).

Elsewhere in the financial sector, MF Global (MF) slumped 20% in active trade, falling for a second session after admitting it lost $141.5 million after a rogue trader made unauthorized bets. Goldman Sachs, Credit Suisse and UBS all downgraded the stock and Moody's and S&P cut their ratings on the company's debt Friday.

Among other movers, shares of R.H. Donnelley (RHD) plunged for a second session after Bear Stearns and Deutsche Securities downgraded the stock of the phone book publisher and search engine operator. R.H. Donnelley slumped Thursday as well after reporting fourth-quarter earnings that missed forecasts and issuing a first-quarter outlook that is shy of expectations.

Market breadth was negative. On the New York Stock Exchange, losers topped winners four to one on volume of 650 million shares. On the Nasdaq, decliners topped advancers five to two on volume of 1.07 billion shares.

Other markets. U.S. light crude oil for April delivery fell 64 cents to $101.95 a barrel on the New York Mercantile Exchange, after ending the previous session at a record close of $102.59. The front-month contract touched a new trading high of $103.05 in electronic trading.

COMEX gold for April delivery fell $1 to $966.50 an ounce.

Treasury prices rallied, lowering the yield on the benchmark 10-year note to 3.57% from 3.66% late Thursday. Bond prices and yields move in opposite directions.

In currency trading, the dollar touched a fresh all-time low versus the euro before recovering a bit. The greenback hit a three-year low against the yen.