Brutal selloff on Wall Street

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Markets cap off a lousy week with the Dow losing more than 300 points. Play video

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NEW YORK (CNNMoney.com) -- Stocks tumbled Friday, in the second worst day of 2008, after AIG's record loss added to worries about the financial sector and more weak economic news intensified fears about a recession.

Treasury prices rallied, sending yields higher, as investors sought safety in the comparatively safer haven of government debt, while the dollar held near a record low versus the euro. Oil prices dipped after topping all-time highs over $103 a barrel during the session. Gold prices jumped too.

The Dow Jones industrial average (INDU) lost nearly 316 points, or 2.5%. The broader Standard & Poor's 500 (SPX) index lost 2.7% and the Nasdaq composite (COMP) fell 2.6%. The Russell 2000 (RUT) small-cap index also got slammed, tumbling 2.7%.

Stocks tumbled for the month of February as well, extending the wretched start to 2008.

"It's a debacle today," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams. "There's just no good news out there."

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.

Brokerage UBS said financial firms could end up facing $600 billion in losses as the credit crisis continues to unfold. Banks, brokers and insurers have already lost more than $160 billion related to bad mortgage bets. UBS also cut its first-quarter earnings estimates on a number of investment banks.

Financial stocks were also under pressure as municipal bonds continued to be liquidated as fund managers struggle to raise capital.

"The lack of liquidity in areas of the bond market is spooking people," said Rob Lutts, chief investment officer at Cabot Money Management.

He said banks are reviewing their asset portfolios and anything that is seen as having too much risk is being reviewed, cut back or eliminated altogether.

"Today the casualty is the municipal bond market," he said.

Dell (DELL, Fortune 500) reported quarterly profit that fell from a year earlier and missed estimates late Thursday. The PC maker also issued a cautious outlook, saying some large customers are holding back on purchases. Shares fell 4.6% Friday.

"We got some horrible news today with UBS and AIG, then you also have Dell, oil, everything else, and this market is just looking to sell off," said Greg Church, president at Church Capital.

After the close, Berkshire Hathaway (BRKA, Fortune 500)'s Warren Buffett released his annual report to shareholders, touching on Berkshire's 2007 performance; warning investors not to count on the company always seeing big returns; discussing Berkshire's involvement in the derivatives business; and detailing Berkshire's successful bet on the Brazilian currency, the real.

Bond insurers get a mix of news. CNBC reported that a proposed $2.5 billion bailout of troubled bond insurer Ambac Financial has hit some significant snags, sending Ambac (ABK) shares 6% lower and adding to economic worries. Rival MBIA (MBI) declined too.

Also dealing a blow to Ambac and MBIA was news that billionaire investor Wilbur Ross said he was injecting up to $1 billion in rival bond insurer Assured Guaranty (AGO). Assured stock rose 12.6%.

Church said that some good news on the bond insurers in the near term could temper fears a bit. Yet, broader worries aren't likely to disappear because of the uncertainty about the depth and extent of the housing and credit market crises.

Rovelli said that he thinks stocks will probably fall close to the levels hit on Jan. 23, which same Wall Streeters think was the market bottom in the short term. He said he doesn't think stocks will fall to the intraday low from January, which was about 11,644 on the Dow, but they could fall below the closing low of around 11,971 from Jan. 22.

"Hopefully, that will be an entry point for everyone," Rovelli said.

But other analysts think stocks may be setting up for a bigger decline. Jack Ablin, chief investment officer at Harris Private Bank, said the market probably needs to pull back another 8% to 10%. He also said analysts' earnings estimates remain unrealistically high for the year.

"We need to reset expectations," Ablin said. "Once the market gets back to fair value, at least there will be an entry point where we can get back in."

Economic news mostly negative. The Chicago PMI, a report on manufacturing in the Midwest, fell more than expected, sliding to 44.5 in February from 51.5 in the previous month, marking 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 gaining 0.5% in December. Economists surveyed by Briefing.com thought income would rise 0.2%. Spending grew 0.4% after gaining 0.3% in December, versus expectations for a rise of 0.2%.

Core PCE, the report's inflation component, grew 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, jumped 2.2% versus a year earlier. That's above the 1% to 2% range for that indicator that the Federal Reserve is said to prefer.

Eye on the Fed. 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.

Fed Governor Frederic Mishkin and Boston Fed President Eric Rosengren - speaking at a housing conference - said the crisis in the sector could hurt the economy more severely than it already has if steps aren't taken soon to correct it. (Full story).

St. Louis Fed Bank President William Poole spoke at the same conference in the afternoon. Poole said the Fed has a responsibility to help out borrowers who got themselves into trouble, but less so the financial firms.

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 18% 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.

Telecom Sprint Nextel (S, Fortune 500) tumbled 10% in active New York Stock Exchange trade after S&P put the company on a watch list for a potential downgrade because of the subscribers its losing. On Thursday, the wireless carrier reported a fourth-quarter loss versus a profit a year ago, said it lost 100,000 subscribers in the quarter and forecast it would lose 1.2 million subscriptions in the first quarter, topping forecasts.

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.

On the upside, Gap shares gained 4% in active trade after reporting higher quarterly income that met forecasts. In the late Thursday announcement, the clothing retailer also said its board had authorized a $1 billion share buyback plan.

Market breadth was negative. On the New York Stock Exchange, losers topped winners six to one on volume of 1.26 billion shares. On the Nasdaq, decliners topped advancers three to one on volume of 2.04 billion shares.

Other markets. U.S. light crude oil for April delivery fell 75 cents to settle at $101.84 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 rallied $7.50 to settle at $975 an ounce.

Treasury prices jumped, lowering the yield on the benchmark 10-year note to 3.51% 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.