Bear's Woes Wallop Wall Street

Updated from 3:52 p.m. EDT

Stocks in New York tumbled Friday as traders fretted that a funding crisis at Bear Stearns (BSC Quote) could mean more trouble is yet to come for the financial sector.

The Dow Jones Industrial Average slumped 194.65 points, or 1.6%, to 11,951.09, and the S&P 500 dropped 27.34 points, or 2.1%, to 1288.14. The Nasdaq Composite sank 51.12 points, or 2.3%, to 2212.49.

The declines ensured the erasure of all of the gains from a massive rally Tuesday , when the Federal Reserve's plan to inject $200 billion worth of liquidity into the market sent the Dow up more than 400 points. For the week, the Dow lost 2.6%, and the S&P sank 0.4%, though the Nasdaq managed to roughly break even.

The story of the day Friday was Bear Stearns (BSC Quote), whose shares lost nearly half their value after Alan Schwartz, president and chief executive of the brokerage, said Bear's "liquidity position in the last 24 hours had significantly deteriorated."

That prompted the company to get emergency funding from JPMorgan Chase (JPM Quote) that will be backed by the New York Federal Reserve bank. The move comes just days after Schwartz said Bear had ample liquidity.

Bear Stearns' stock plummeted 47.4% to $30, as more than 186 million shares changed hands.

"Everyone's hoping for a solution to the credit problem, and this is evidence that we're not near the end of it," said Charles Rotblut, senior market analyst with Zacks Investment Research. It's also troubling, he said, that Schwartz made such a quick reversal from his confident position of earlier this week, and that the situation closely follows recent margin calls at a Carlyle Capital fund and at Thornburg Mortgage (TMA Quote).

"The last thing the Fed wants is uncertainty, and Bear just us gave a huge dose of uncertainty," Rotblut said.

Shortly after the Bear news came out, the Fed announced that it is "monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system." The central bank said its board had unanimously approved Bear's financing by JPMorgan.

"I think this is just another in a series of earthquakes and tremors going through the stock market, and it's shaken investor confidence in the structure of the global banking system," said Fred Dickson, senior vice president and market strategist with D. A. Davidson. "It makes investors wonder, 'who's next?'"

The NYSE Financial Sector Index plummeted 3.6%, and the KBW Bank Index slid 4.2%.

The Amex Securities Broker-Dealer Index took a 8.6% freefall as it was weighed down heavily both by Bear and fellow investment bank Lehman Brothers (LEH Quote), which closed down 14.6%. According to reports, Lehman's 5-year credit-default swaps, or the cost of insuring its debt for five years, have widened by some 65 basis points to 4.65% of principle.