The Dow Jones Industrial Average plunged below the key psychological 12,000 level for the first time since March on Friday as fears spread that the global economic recovery is losing steam.
Meanwhile, a top Federal Reserve official warned that the pace of growth will remain "painfully slow" for many and the risks to recovery have increased.
Although financial conditions have improved and the pace of job creation has quickened in the last year, a recent run of disappointing data suggested the recovery is increasingly at risk, New York Federal Reserve President William Dudley said in a speech to business leaders in Brooklyn, N.Y.
High food and energy prices and a weak housing market were among the main factors likely to keep consumer budgets tight, he said.
"I anticipate economic growth will pick up enough in the second half of 2011 to sustain a moderate economic recovery," Dudley said. "Still, the pace of recovery will probably be painfully slow for the many unemployed and underemployed workers."
While non-food and non-energy price rises remain modest, he said it is crucial for the Fed to ensure inflation expectations remain in check.
Fears that the economic recovery has stalled weighed on markets Friday and drove the stock market lower for its sixth straight week.
The Dow fell 172 points, or 1.4 percent, to close at 11,952.
The S&P 500 index fell 18, or 1.4 percent, to 1,271. The Nasdaq dropped 41, or 1.5 percent, to 2,644. The Nasdaq has now given up all its gains for the year. The Dow is still up 3.2 percent for 2011 and the S&P 1.1 percent.
The losses were broad, with declines across all 10 of the S&P 500's industry groups.
Four stocks fell for every one that rose on the New York Stock Exchange. Trading volume was 3.9 billion shares.
Friday's plunge was the stock market's sixth straight weekly loss, the longest weekly losing streak since the fall of 2002. The market's last seven-week stretch of losses began in May 2001, as the dot-com bubble deflated.
Stocks have suffered this month after weak economic news dampened hopes for a speedy recovery. Traders fear that weaker hiring, industrial output, and a moribund housing market are reversing a bull market that has lifted the Dow 20 percent over the past year.
Analysts said the pullback reflects traders' insecurity about the pace of the recovery.
"Recent economic reports have been very weak and people are worried about the idea of a double-dip recession," said Janna Sampson, co-chief investment officer of OakBrook Investments LLC in Lisle, Illinois.
"I am still expecting to see second-half growth, and the market pick back up as we see that," Sampson told Reuters. "But are we going to see it before we get earnings reports for the second quarter? I doubt it. June is probably going to be pretty weak."
Financial markets widely expect the U.S. central bank to hold benchmark interest rates near zero until 2012 to help boost an economy still struggling with a high jobless rate.
Earlier this week, Fed Chairman Ben Bernanke said accommodative policies are still needed. "Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established," he said during a speech in Atlanta.
The annualized pace of U.S. growth slowed to 1.8 percent in the first three months of 2011, down from 2.8 percent in the fourth quarter of 2010. Dudley said growth it is likely to remain sluggish in the April-to-June period.
Dudley added that any attempt by Congress to tighten fiscal policy through spending cuts or tax increases would add to the short-term growth risks for the economy.
"I would emphasize, however, that a credible plan for long-term fiscal consolidation is sorely required and would have economic benefits," he said.
Congress and the White House are at odds over how to shrink a gaping U.S. budget deficit and a rising public debt burden. Several ratings agencies have warned that the country needs to address its public finances lest it risk losing its cherished AAA credit rating.
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