Dow and S&P sink to '97 levels

Markets skid on news of Citi deal, worse-than-expected GDP report. Two major gauges hit trading levels not seen in over 11 years.

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By staff

NEW YORK ( -- Stocks tumbled Friday morning on news that the government will control a much bigger chunk of Citigroup and the economy suffered the worst decline in 26 years in the fourth quarter of last year.

Both news items added to bets that the recession will stretch on longer than has been expected.

The Dow Jones industrial average (INDU) lost 130 points, or 1.8%. The S&P 500 (SPX) index lost 16 points or 2%. Both the Dow and S&P 500 were at their worst intraday levels since 1997.

The Nasdaq composite (COMP) lost 6 points, or 0.5%

Citigroup (C, Fortune 500) and the Treasury Department announced a deal that would convert up to $25 billion in preferred shares held by the U.S. government into common stock. This would give the government control of as much as 36% of the beleaguered bank company.

Under the deal, Treasury will replace a majority of the board of Citigroup, but CEO Vikram Pandit and Chairman Richard Parsons will retain their positions.

Citi shares plunged 30% in early trading as investors interpreted the deal as a sign that another bank was "basically nationalizing," according to Todd Leone, head trader at Cowen & Co.

Bank stocks continue to be front and center as investors hope that the various plans to help the financial sector will work. But with few new details emerging, financial shares remain under pressure. Shares of Bank of America (BAC, Fortune 500) were 15% lower in market trading.

And on Thursday, the FDIC said its latest problem bank list had swelled to 252 - the highest since 1994.

Economy: At 8:30 a.m. ET, the government announced that GDP, the broadest measure of the economy, shrank by a revised annual rate of 6.2% in the fourth quarter. Economists surveyed by had expected a 5.4% decline.

After the opening bell, the National Association of Purchasing Management will release the Chicago PMI - a measure of the manufacturing industry in the Midwest, which is used as a gauge for the wider economy. The PMI is expected come in unchanged at 33 for February.

Companies: Ford Motor (F, Fortune 500) will reopen a plant in Cleveland that has been retooled to build more energy-efficient engines, Dow Jones reported. The move will create 250 jobs.

After the closing bell Thursday, computer maker Dell (DELL, Fortune 500) reported earnings and revenue that missed analyst expectations. The company also hiked its cost reduction target to $4 billion from $3 billion.

On Thursday, stocks fell as investors fretted about details of President Obama's budget outline. Obama unveiled the first version of his federal budget for the next 10 years, including an ambitious plan to reform health care, to be funded in part by hiking taxes on the rich. Healthcare stocks, including Merck (MRK, Fortune 500) and Pfizer (PFE, Fortune 500), fell on the news.

The Asian markets ended mixed Friday, with Tokyo's Nikkei index gaining 1.5%. The European indexes were lower in morning trading.

Oil and money: Oil prices fell $1.75 a barrel to $43.47. The dollar fell against the yen and was little changed versus the euro. To top of page

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