Updated from 11:09 a.m. EDT

The U.S. stock market continued its deep slump after opening Friday with a biting downdraft. Continued jitters about

Fannie Mae

and

Freddie Mac

overshadowed

in-line earnings

at

General Electric

(GE) - Get Report

and another deal in the chemicals space.

The

Dow Jones Industrial Average

shed 197 points to 11,032, and the

S&P 500

was stumbling 18 points at 1235. The

Nasdaq

dropped 28 points to 2229.

Weighing heavily on sentiment were Fannie and Freddie, the government-sponsored mortgage buyers whose shares have been under severe pressure for most of the week. The latest cause for worry was speculation that the federal government would be forced to step in to secure their financial health. Speaking today in Washington, D.C., Treasury Secretary Henry Paulson said he doesn't foresee a government bailout for Fannie and Freddie.

After losing half their value early in the day, shares of Fannie and Freddie were both lately down around 22%.

Bond issues for Fannie and Freddie have held up surprisingly well, said Bob Pavlik, chief investment officer at Oaktree Asset Management. He said that while short-term bonds are safer because mortgage borrowers can continue making payments, he sees more trouble for the longer term as foreclosure rates increase.

As for worries about the government's role, Pavlik said that despite Paulson's comments, the Fed and Treasury are probably working behind the scenes to find a solution. "Failure of these two firms is just, I don't see how you can let it happen," he said. "If there was a big possibility of that happening, you'd see a pullback in the bond market."

On the equity side for Fannie and Freddie, Pavlik said investors are concerned that Fannie and Freddie will have to raise additional dilutive capital, and uncertainty is shaking investors. "You're not even getting a true picture on that because OFHEO (the Office of Federal Housing Enterprise Oversight) is telling you one thing while former Fed presidents are telling you something else," he said, referring to Bill Poole's statement earlier this week that Fannie and Freddie are "insolvent."

Some equity sellers are worried about failure, Pavlik said, but "It's hard to imagine at 11:20 on Friday that these things can actually fail."

President Bush, in comments to reporters Friday, said Federal Reserve Chairman Ben Bernanke was "working very hard" to address the issues plaguing Fannie and Freddie and touted the economic stimulus checks recently sent to taxpayers as having helped retail sales in June.

The economy, however, remains hampered by high gasoline price, Bush said. He pushed Democratic leaders to open up domestic oil exploration, particularly offshore, in Alaska and in western oil shale.

"One way to deal with supply problems is to increase supply here in America," he said.

Fears about the mortgage insurers were relegating the quarterly report from GE to the back burner. GE posted a quarterly profit of 54 cents a share and met estimates, while revenue climbed 11% to $46.9 billion. GE also said it would sell its Japanese consumer finance business to Shinsei Bank for $5.4 billion.

Also keeping the buyers sidelined was a record high for oil, whose price this week has traversed a wide range. After falling $10 in two days, crude has now rebounded to new record highs, breaking the $147 mark before settling back somewhat to $143.10, up $1.45 a barrel in New York. Gold was gaining $15.80 at $957.80.

"The market is tremendously concerned that something can happen over this weekend, and no one wants to be long over this weekend, especially when Israel is practicing bombing runs," said Pavlik. Were there to be further escalations in tensions between Israel and Iran, oil could spike to $170 or more, he said.

For the second time in two days, a deal is taking place in the chemicals sector. A day after

Dow Chemical

(DOW) - Get Report

said it would buy

Rohm & Haas

(ROH)

in a pact worth nearly $19 billion, including debt,

Ashland

(ASH) - Get Report

disclosed plans

to acquire

Hercules

(HPC)

for more than $3 billion.

Elsewhere,

The Wall Street Journal

reported that Belgium's

InBev

is lifting its takeover proposal for

Anheuser-Busch

(BUD) - Get Report

by $5 to $70 a share after the U.S.-based maker of Budweiser said it wasn't interested in the early $46 billion offer.

After the market closed yesterday, energy-patch denizen

Chevron

(CVX) - Get Report

forecast an encouraging second-quarter profit. The company said that oil production profits would compensate for losses in its refining business.

In the financial sector,

Credit Mutuel

of France offered $7.7 billion for

Citigroup's

(C) - Get Report

German retail operations. If regulators clear the agreement, the sale could close in the fourth quarter.

Harried financial firm

Lehman Brothers

(LEH)

, which sank Thursday on rumors that trading partner Pimco was reducing its exposure to Lehman because of liquidity worries. A Pimco spokesman later denied the rumor, but Lehman continued to tumble, lately down 20%.

In technology,

Apple

(AAPL) - Get Report

began permitting consumers to buy its highly anticipated 3G iPhone this morning.

Away from stocks, long-dated Treasuries were falling as investors contemplated the government's role in a potential Fannie-Freddie bailout. The 10-year was shedding 20/32 in price, yielding 3.87%, and the 30-year was losing 27/32 to yield 4.47%. The dollar was falling hard against the yen, euro and pound. The dollar index, which measures the dollar against a basket of foreign currencies, was dropping 0.6% at 72.04.

As for data, the Commerce Department reported that the U.S. trade deficit slimmed by 1.2% in May to $59.8 billion from $60.5 billion in May. Analysts were expecting the deficit to broaden to $62.2 billion.

June U.S. export prices, excluding agriculture, rose 0.9% in June, while import prices, subtracting oil, rose 0.3%, according to the Bureau of Labor Statistics.

The University of Michigan's consumer sentiment index for July registered 56.6, up from a June level of 56.4 and ahead of economists' predictions.

Overseas, action was mixed. Hong Kong's Hang Seng was gaining, while Frankfurt's DAX, London's FTSE and Japan's Nikkei were slipping