Financial stocks were mixed Friday as weak employment data pummeled the broader market and an analyst downgraded

Merrill Lynch

( MER) to "sell," citing the potential for "very weak" results from investment banks and the likelihood that credit markets will deteriorate further.

Recent data on rising unemployment, falling oil demand, weak retail sales and new records for mortgage delinquencies indicated the economy isn't likely to improve any time soon and sent chills through the market.

The NYSE Financial Sector index shed 0.7% Friday as the

Dow Jones Industrial Average

dropped a more modest 0.5%.

Merrill shares fell 2% recently to $25.69 after Goldman Sachs analyst William Tanona said Merrill shares were far more overvalued than the company's peers, despite its relatively weak positioning in the sector. Tanona based his downgrade on Merrill's potential for higher writedowns on mortgage-related assets, higher compensation costs and costs related to an auction-rate security probe.

Bank of America

(BAC) - Get Report

on Friday became the latest bank to say it is ready to settle the auction-rate securities investigations being pursued by state and federal authorities.

Reuters

reported the bank reached an agreement in principle about two weeks ago, although officials said no deal has been reached yet. Bank of America shares rose 1% to $30.91.

M&T Bank

(MTB) - Get Report

shares also responded to an analyst downgrade on Friday, falling 3% to $70.46. Robert W. Baird analyst David George downgraded the stock to "neutral," citing share-price performance, rather than the company's fundamentals. He called M&T "one of the higher-quality names" in the sector.

Other regional banks were rising, however, despite recent reports that more pain may be ahead for them as well.

Huntington Bancshares

(HBAN) - Get Report

was up 4.6% at $7.91,

KeyCorp

(KEY) - Get Report

rose 3.9% at $12.39, and

Regions Financial

(RF) - Get Report

gained 2.3% to $10.74.