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Stocks Plunge Into the Weekend

Credit worries send the Dow Jones Industrials plummeting 281 points.

Updated from 4:01 p.m. EDT

Stocks plunged into the close Friday as troubling debt-related comments from

Bear Stearns

(BSC)

sent the New York market spiraling downward.

The

Dow Jones Industrial Average

tanked 281.42 points, or 2.09%, to 13,181.91. The

S&P 500

tumbled 39.14 points, or 2.66%, to 1433.06, and the

Nasdaq

ended down 64.73 points, or 2.51%, at 2511.25.

"On a Friday during the summer months, you're going to see this type of large decline as the negative tone keeps feeding upon itself," said Art Hogan, chief market analyst with Jefferies. "The buyers packed up their bags once we picked a direction this morning, and there was no changing it."

Bear Stearns fell hard after finance chief Sam Molinaro said during a conference call that the credit market was "about as bad as I've seen it in 22 years." Following that observation, the stock indices went into a tailspin.

For Bear Stearns itself, it was a two-pronged skid. Earlier it was because Standard & Poor's cut its rating outlook for the broker to negative from stable.

Though the shares recovered, they sank again once the call got underway. Bear Stearns, which has lost 19% over the last month amid liquidity problems at some of its mortgage-related funds, finished down another 5.9% to $108.79.

Also weighing on the mood was the news that lender

American Home Mortgage

(AHM)

is slashing roughly 90% of its work force, and published reports now say the company will shut down after failing to find a buyer for its operations.

Earlier this week, American Home said its backers had cut off its credit and that one of the options that it would consider was liquidation. The stock plummeted 52.1% to 69 cents. American Home Mortgage lost 93.4% of its value this week.

A host of housing and mortgage-related stocks have seen punishing selloffs in recent sessions as investors fled at the first whiff of trouble.

Countrywide

(CFC)

,

Accredited Home Lenders

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and

Beazer Homes

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are among those who have endured precipitous drops, regardless of whether the problem was more imagined than real.

Countrywide and Beazer dropped 6.6% and 13.3%, respectively, during the session.

As expected, the financial sector was creamed. The KBW Bank Index tumbled 4.1%, the Nasdaq Financial 100 Index spiraled 3.8% lower, and the NYSE Financial Sector Index dropped 3.1%.

"This problem is going to linger, and every headline is going to cause even more nervousness in the market," said Peter Cardillo, chief market economist with Avalon Partners. "Hopefully, these fears will begin to wane. If the credit crunch story should begin to expand further past these related names, then we can say these fears aren't overblown."

For the market overall, the fear that an unraveling housing sector is threatening to take down the entire economy has meant incredible volatility for the major indices of late.

During the prior two sessions, the Dow rallied around 250 points, but almost the entirety of those gains were collected during the final hour of trading each day. Intraday swings have become the norm, and stock averages have repeatedly turned on a dime from positive to negative and back again.

Last time out, the Dow rose 100.96 points, or 0.76%, to 13,463.33. The S&P 500 was up 6.39 points, or 0.44%, to 1472.20, and the Nasdaq gained 22.11 points, or 0.87%, to 2575.98.

Friday's steep decline resulted in another poor weekly performance for the major averages. Over the five sessions, the Dow slipped 0.6%, the S&P 500 slid 1.6%, and the Nasdaq gave back 1.9%.

On the

New York Stock Exchange

4.54 billion shares changed hands, as decliners topped advancers by a 5-to-1 margin. Volume on the Nasdaq reached 2.53 billion shares, with losers outpacing advancers 4 to 1.

Meanwhile, the employment report, one of the most important pieces of data the government releases every month, showed that 92,000 workers were added to nonfarm payrolls in July. Economists had expected 135,000 positions to have been created.

The unemployment rate edged higher to 4.6% from 4.5% in June. Average hourly earnings, a key inflation metric, rose 0.3%, matching estimates.

Job growth for the prior month was revised downward. The government now says 6,000 fewer employees were put to work in June than had been first thought.

While jobs growth slowed, the small rise in wage growth could provide inflation comfort to the

Federal Reserve

. The central bank will meet for fifth time this year on Tuesday, but no change in the target fed funds rate is expected.

Ian Shepherdson, chief economist with High Frequency Economics, said that the trend in slowing payroll growth means that the Fed will have to cut interest rates further down the road.

"The household survey is volatile but the six-month average change in employment has slowed to just 26,000," he said. "If this persists, unemployment will rise further and the Fed, eventually, will have to ease."

Paul Mendelsohn, chief investment strategist with Windham Financial, pointed out that the jobs number isn't showing a major disintegration in employment.

"I don't think this number has any effect on what the Fed will do in terms of their decision making," he said. "The market has many other issues to deal with, as the other shoe looks to be dropping in the credit market."

There was more trouble for investors on the economic docket. The Institute for Supply Management's services index fell to a reading of 55.8 in July from 60.7 the previous month. The data were well below consensus and hit the lowest point since March.

Elsewhere, consumer products giant

Procter & Gamble

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posted quarterly earnings that were a little better than expected. The company also set plans to buy back as much as $30 billion of its stock, and it affirmed its fiscal 2008 forecast. Still, shares lost 42 cents, or 0.7%, to end at $62.88.

Treasury prices were on the rise. The 10-year note was up 18/32 in price, yielding 4.69%, and the 30-year bond added 23/32, yielding 4.86%.

Lower oil prices offered bulls little solace. After setting a record intraday high of $78.77 a barrel earlier this week, the September benchmark crude contract has pulled back and finished down $1.38 at $75.48 a barrel.