NEW YORK (

TheStreet

) -- U.S. stocks finished Friday's session with another down day, tumbling sharply after reports that

Fitch downgraded Spain's long-term foreign and local currency issuer default ratings to AA+ from AAA, all while maintaining a stable outlook. Though stocks had been paring losses in the afternoon, the major indices turned decidedly lower at the close, also weighed by a mix of economic data and as traders prepared for a long holiday weekend.

The

Dow Jones Industrial Average

closed 122 points lower, or 1.2%, at 10,137, also turning in its worst May performance since 1940, when it lost 21.7%. The

S&P 500

shed 14 points, or 1.2% at 1089, while the

Nasdaq

ended 21 points down, or 0.9%, at 2257.

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In May, the Dow was down 871.98 points, or 7.92%, snapping a string of three monthly gains. It was the biggest monthly point and percent drop since February 2009.

Despite volatile trading that took its cue largely from negative sentiments toward the eurozone, the Nasdaq and the S&P closed higher for the week, adding 1.3% and 0.2%, respectively. The Dow lost 0.6% since last Friday's close.

"It's a little surprising, I guess," said Robert Pavlik, chief market strategist at Banyan Partners, about the timing of the downgrade. "But, at the same time, we probably should have expected it given everything we've heard. That, combined with a relatively slow day, is only giving the markets a reason for going lower."

"So Fitch downgrades Spain from AAA to AA+. Fine. But then they put a 'stable' outlook? Seriously," wrote Tom Graff, managing director at Cavanaugh Capital Management and

RealMoney

columnist,

in a contributor post. "That would imply that something has happened to make Spain a moderately higher risk, but that the situation is otherwise stable. That is entirely not the case with Spain. The Spanish people are facing some pretty severe budget cuts and/or tax hikes. These may cause GDP growth to decline, further pressuring the public sector. I'm not saying Spain can't do it. They just might. But to call it 'stable' is asinine."

Even before the downgrade, which forced the euro into retreat, stocks appeared to take a step back following a large Thursday rally. One market participant said the coming Memorial Day weekend, coupled with some uneasy details in the morning's economic data releases, were enough to cast a pall.

"Traders are squaring positions going into the long weekend," said Alan Gayle, senior investment strategist at RidgeWorth Investments, earlier in the day. "The market seems to be focusing on the flat spending number in April, confirming the consumer is off to a slow start in this recovery"

"Between the flat spending and the dip in the employment component of the Chicago Index, I think that's giving some softness to the day," he added.

Overseas on Friday, Hong Kong's Hang Seng rose 1.7%, and Japan's Nikkei jumped 1.3%. The FTSE in London slipped 0.1%, while the DAX in Frankfurt gained almost 0.2%.

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The Economy

The Department of Commerce said personal spending was unchanged in April, after rising 0.4% March. April personal income, meanwhile, increased by 0.4%, as it did in March. Personal spending was weaker than the 0.4% growth that economists had been expecting, and personal income was largely in line with the 0.3% uptick that was expected.

In its monthly assessment of regional manufacturing activity, Chicago's Institute for Supply Management reported its main index registered 59.7 in May, down from a multiyear high 63.8 reading the month before. The mark landed near economists' expectations for a reading at 60, according to consensus projections provided by Briefing.com, though an individual gauge tracking employment showed acute weakness.

Consumer sentiment picked up a tad in May, according to The University of Michigan's index, edging higher to read 73.6 this month after registering 72.2 in April. This compares to the 73.4 reading expected by Wall Street.

The

Federal Reserve

said it scheduled the first three small-value auctions under its Term Deposit Facility, which are meant to test the TDF system before central bankers ultimately unwind their accommodative policies.

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Company News

Walt Disney

(DIS) - Get Report

,

Bank of America

(BAC) - Get Report

and

3M

(MMM) - Get Report

were the steepest decliners on the Dow, while shares of

Coca-Cola

(KO) - Get Report

,

Procter & Gamble

(PG) - Get Report

and

Merck

(MRK) - Get Report

were the only blue-chip components to finish in positive territory.

Flagstar Bancorp

(FBC) - Get Report

and

Ambac Financial

( ABK) turned in the best performance on the New York Stock Exchange, while

Universal Corporation

(UVV) - Get Report

and

Oceaneering International

(OII) - Get Report

were acting as the chief laggards.

The U.K.'s

Prudential

(PUK) - Get Report

said it's holding discussions with

AIG

(AIG) - Get Report

on the terms of its $35.5 billion acquisition of AIG's Asian unit AIA.

Royal Dutch Shell

(RDS.A)

agreed to acquire nearly all of privately owned natural gas explorer

East Resources

for $4.7 billion in cash.

Toys "R" Us

is planning for an initial public offering, according to a preliminary registration statement filed with the

Securities and Exchange Commission

.

According to dispatches from the

BP

(BP) - Get Report

oil spill, conclusive results on efforts to plug the leak using the so-called

"top kill" procedure won't be definitely known until Sunday. So far, BP has spent $930 million responding to the crisis. President Obama traveled to the Gulf Coast to view the spill's damage today.

The foreign launch of

Apple's

(AAPL) - Get Report

iPad was met with scenes of enthusiastic crowds and long lines in nations like Japan and Australia, according to

The Wall Street Journal.

The device also made its arrival in Canada, France, Germany, Italy, Spain, Switzerland and the U.K.

In settlement talks with the

Securities and Exchange Commission

,

the

Financial Times

reported

Goldman Sachs

(GS) - Get Report

is trying to reach agreement on a lesser charge than the current fraud allegations, coupled with a large fine.

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Commodities and the Dollar

Crude oil for July delivery shed 58 cents to settle at $73.97 a barrel.

Elsewhere in commodity markets, the

June gold contract finished 30 cents higher to settle at $1,212.20 an ounce. The more actively traded August contract gained 60 cents at $1,215 an ounce.

The dollar was trading higher against a basket of currencies, with the

dollar index up 0.4%.

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Treasuries

The benchmark 10-year Treasury rose 15/32, decreasing the yield to 3.303%.

The two-year note increased 7/32, diluting the yield to 0.774%. The 30-year bond gained 21/32, dropping the yield to 4.216%.

--Written by Sung Moss and Melinda Peer in New York

.

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