Worst day in 3 months

By Alexandra Twin, senior writer

NEW YORK(CNNMoney.com) -- Stocks slumped for a third straight session Friday, on worries that the White House's bank plan and China's lending curbs will mean a broader cutback in lending.

Questions also arose over whether Fed Chairman Ben Bernanke's term will be renewed.

The Dow Jones industrial average (INDU) fell 217 points, or 2.1% Friday. The S&P 500 index (SPX) slid 25 points, or 2.2%. The Nasdaq composite (COMP) lost 60 points, or 2.7%.

For the holiday-shortened trading week, the S&P 500 lost 3.9% and the Nasdaq lost 3.6%, with both indexes seeing their biggest one-week declines since the week ended Oct. 30, 2008.

The Dow's weekly loss of 4.1% was the average's worst since the week ended March 6, 2009, when it closed at a 12-year low. That period was considered to be the bottom of the bear market. Since then, the Dow has gained 57% through Friday's close and the other major gauges have gained comparable amounts.

"We've had a wonderful run up in stocks and clearly people have been looking for a reason to take some money off the table," said Ram Kolluri, chief investment officer at ICICI Group Global Private Clients. "This week, they found some reasons."

He said that the market could sell off a little more next week, but that for the most part, it's likely to find a support level in the week ahead.

A heavy spate of quarterly earnings reports are due next week, with 27% of the S&P 500 or 136 companies scheduled. Standouts include Apple (AAPL, Fortune 500), Yahoo (YHOO, Fortune 500), Microsoft (MSFT, Fortune 500), Amazon.com (AMZN, Fortune 500) and Chevron (CVX, Fortune 500).

Three-session rout: Selling began Wednesday on reports that China has asked banks to slow the pace of lending this year in an attempt to get ahead of inflation. It picked up Thursday with Obama's bank plan and continued Friday with questions about Bernanke.

Stocks were also vulnerable to a pullback after surging over 3% since the start of the year, with the major gauges having touched nearly 16-month highs on Tuesday.

In the three day selloff, the Dow lost 5.1%, the S&P lost 5.1% and the Nasdaq lost 5%.

Banks: In the wake of the credit crisis, the government is looking to limit the ability of commercial banks to make high-risk trades and stop them from owning or investing in hedge funds.

If such a policy is enacted, it would separate commercial and investment banks in a throwback to a Depression-era law that has been out of use for a decade.

"There's still a lot of frustration with the big banks and I think there's a belief that this (Obama) bank plan is not necessarily going to help investors," said Gary Webb, CEO at Webb Financial Group.

He said that while the announcement indicates banks won't be able to pass on any additional costs or fees to consumers, there's a sense that they will find creative ways to pass the costs on anyway.

"I also think this is an emotional reaction to the news and that by next week, as people have processed it more, you'll see stocks recovering," Webb said.

Large banks such as JPMorgan Chase (JPM, Fortune 500), Goldman Sachs (GS, Fortune 500) and Bank of America (BAC, Fortune 500) would feel the brunt of the impact. All three slipped Friday.

But a few of the regional banks, including Fifth Third Bancorp (FITB, Fortune 500) and SunTrust Banks (STI, Fortune 500) bucked the trend for a second straight session.

Bernanke: Federal Reserve Chairman Ben Bernanke's term ends in a week, but the Senate lacks the 60 votes to force a confirmation vote. As more Democratic senators say they plan to vote against giving the Fed chief a second term, White House and Senate leaders are starting to scramble for the needed support.

Results: General Electric (GE, Fortune 500) reported weaker revenue and earnings versus a year ago that nonetheless beat analysts' estimates. GE also reported higher sales and profit versus the previous quarter, with the exception of its struggling NBC Universal unit.

Looking forward, GE said it sees solid growth next year. Shares added 0.6%.

Fellow Dow component McDonald's (MCD, Fortune 500) reported higher quarterly sales and earnings that topped estimates, with strength in international markets offsetting any weakness in its U.S. business. Shares rose 0.3%.

After the close Thursday, American Express (AXP, Fortune 500) reported higher earnings that beat forecasts on flat revenue that also beat estimates. Nonetheless, shares of the financial services firm lost 8.5% in Friday trading.

Also after the close Thursday, Google (GOOG, Fortune 500) reported a big jump in revenue that topped estimates thanks to a rebound in the advertising market. However, shares lost 5.7% Friday.

Jobs: A report showed that December jobless rates rose in 43 states and the District of Columbia versus the previous month. The trend marked a reversal from November, when a majority of the states saw unemployment rates dip from the prior month.

World markets: Asian markets tumbled, with the Japanese Nikkei losing 3%. European markets tumbled as well.

Commodities and the dollar: The dollar fell versus the euro and the yen after rising for the last few sessions.

COMEX gold for February delivery fell $13.50 to settle at $1,089.70 an ounce. Gold closed at an all-time high of $1,218.30 an ounce last month.

U.S. light crude oil for February delivery slipped $1.54 to settle at $74.54 a barrel on the New York Mercantile Exchange.

Bonds: Treasury prices fell, raising the yield on the 10-year note to 3.61% from 3.69% late Thursday. Treasury prices and yields move in opposite directions.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by over four to once on volume of almost 1.5 billion shares. On the Nasdaq, decliners topped advancers by more than two to one on volume of 2.84 billion shares.

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