NEW YORK Stocks tumbled Friday as a plan to alleviate a liquidity crisis at Bear Stearns Cos. touched off concerns about the severity of credit troubles. Each of the major indexes lost more than 2 percent; the Dow Jones industrial average gave up about 300 points.
The plan by the New York Federal Reserve and JP Morgan Chase & Co. offers Bear Stearns relief from a sudden liquidity crunch that analysts surmised could have felled the bond house. But the company's position on the precipice of financial disaster left many investors shaken and spoiled some hopes that troubles in the moribund credit market are on the mend.
Stocks showed moderate increases in the early going after a Labor Department report showed the Consumer Price Index remained flat for February. Wall Street has been expecting inflation would show an increase. But the gains quickly disappeared after investors learned about the severity of troubles at Bear Stearns.
"This is another chapter in a book rather than a one-act play," said Phil Orlando, chief equity market strategist at Federated Investors. He said the market is worried that further trouble in the credit markets will emerge and that the ramifications of the credit strains and a slowing economy could result in recession.
"Investors thought they are probably more than norm than the exception and maybe this is the tip of the iceberg," he said, referring to Bear Stearns. "Our sense is that this is sort of an amoeba here and this is sort of a broadly spreading situation."
In midafternoon trading, the Dow fell 307.57, or 2.53 percent, to 11,838.17, near its lows of the session.
Broader stock indicators also declined. The Standard & Poor's 500 index fell 38.63, or 2.94 percent, to 1,276.85, and the Nasdaq composite index fell 70.19, or 3.10 percent, to 2,193.42.
The Russell 2000 index of smaller companies fell 22.62, or 3.33 percent, to 657.09.
Bond prices jumped as stocks retreated. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.43 percent from 3.54 percent late Thursday.
Elisa Parisi, economic analyst at RGE Monitor.com, contends the bond market has recently shown more concern about the economy.
"The stock market is increasingly catching up with signals from the bond market. Somehow the stock market could delude itself into thinking that they have nothing to do with the mortgage fallout," she said.
Comments from the Fed might have helped corral some of investors' nervousness Friday. The central bank said it voted unanimously to sign off on the arrangement between JP Morgan and Bear Stearns and that it is ready to provide further resources to stave off further credit troubles. Fed Chairman Ben Bernanke also said Friday he would do what was possible to aid struggling homeowners.
Still, investors remained nervous. The Chicago Board Options Exchange's volatility index, known as the VIX, and often referred to as the "fear index," jumped 18.7 percent.
Declining issues outnumbered advancers by about 7 to 1 on the New York Stock Exchange, where volume came to 1.19 billion shares.
"The Bear Stearns news reversed the early positive sentiment from the inflation data," said Peter Cardillo, chief market economist at Avalon Partners. "There had been nervousness about Bear Stearns for some time and now the market's concerns about the company have been proven true."
Friday's stock market pullback comes a day after an anxious stock market rebounded from an early plunge following a Standard & Poor's prediction that financial companies are nearing the end of the massive asset write-downs that have pummeled the stock and credit markets for months. The S&P projection had given investors some hope that the seemingly unrelenting losses from the mortgage and credit crisis could have been bottoming out.
Bear Stearns' woes rekindled investors' nervousness about the troubles in the financial sector. The company's shares skidded $22.32, or 40 percent, to $34.68, while JP Morgan fell $1.53, or 4 percent, to $36.58.
Other financial names declined as well. Lehman Brothers Holdings Inc. fell $6, or 13.1 percent, to $39.99 and Merrill Lynch & Co. slid $2.67, or 5.8 percent, to $43.59.
Stock market investors Friday were also eyeing the dwindling dollar and events in the soaring commodities market. Gold prices touched another fresh record Friday.
Light, sweet crude, which set a fresh record Thursday, fell 22 cents to $110.11 per barrel on the New York Mercantile Exchange.
The market's fall Friday caps a big week for the markets. On Monday, stocks continued a sell-off from last week, falling more than 1 percent as oil again moved into record territory. Then, on Tuesday, stocks surged after the Fed said it would put up $200 billion to loosen tight credit markets. The Dow surged nearly 417 points, its biggest one-day percentage gain in five years. Stocks posted more modest losses and gains Wednesday and Thursday as investors speculated over how much help the Fed's plan would ultimately provide.
On top of Friday's concerns, Wall Street remains anxious for Tuesday's Fed meeting at which the central bank is still expected to lower interest rates. While Wall Street would welcome cheaper access to cash to help consumers and businesses, the freer flow of money could would likely fan inflation concerns and could further weaken the dollar.
Overseas, Japan's Nikkei stock average finished down 1.54 percent. Britain's FTSE 100 closed down 1.07 percent, Germany's DAX index fell 0.75 percent, and France's CAC-40 lost 0.82 percent.