Updated from 4:19 p.m. EST

Stocks tumbled Friday as worries about consumer credit and spending intensified, offsetting news of a big buyout in the beaten-down financial sector.

The Dow Jones Industrial Average slid 246.79 points, or 1.92%, to 12,606.30, and the S&P 500 fell 19.31 points, or 1.36%, to 1401.02. The Nasdaq Composite dropped 48.58 points, or 1.95%, at 2439.94.

"The market is still reconciling the fact that the economy is slowing and might be in a recession," said Paul Nolte, director of investments with Hinsdale Associates. "Valuations may be too high compared to the low earnings, and it might just not be the financials. We need to have volume expanding on winning days and contract on losing days, something we haven't seen yet."

On the New York Stock Exchange 4.47 billion shares changed hands, as decliners topped advancers by a 2-to-1 margin. Volume on the Nasdaq reached 2.40 billion shares, with losers beating winners 7 to 3.

The major averages each finished the week with heavy losses. The Dow declined by 4.2%, and the S&P 500 ended down 4.5%. The Nasdaq was the worst performer, notching a decline of 6.4%.

Contributing to the selloff was American Express ( AXP), who said it will take a charge of $440 million in the fourth quarter as consumers missed payments because of the housing slump. The company also says it expects profits to be lower in 2008 as consumers slow down spending.

American Express was the worst performer on the Dow, falling $4.92, or 10.1%, to $44.

"This decline was basically about American Express, in that we may have a new problem in credit cards to go along with housing and subprime mortgage problems," said Paul Mendelsohn, chief investment strategist with Windham Financial. "All the fear we felt today isn't completely reflected in the trading."

Another Dow loser was McDonald's ( MCD), which shed 6.6% to $54.32 as Friedman Billings said the hamburger chain's stock is fairly priced and predicted that domestic comparable-store sales could slow. In addition, an independent analyst circulated a report indicating that franchisees reported particularly slow growth in December.

Tiffany ( TIF) also added to spending concerns, reporting weaker-than-expected holiday sales in the U.S. and trimming its profit targets. Shares tumbled 11.2% to $35.80.

Notably weak sectors included retailers and airlines, who slid 3.2% and 3.7%, respectively. Semiconductors lost 2.4%.

Meanwhile, a number of financials that have been punished by heavy shorting in recent months appeared to rally on the hopes that salvation might in fact exist, considering Bank of America ( BAC) has agreed to take over struggling mortgage writer Countrywide Financial ( CFC).

MBIA ( MBI) jumped 17.6%, Ambac ( ABK) were up 12%, CIT ( CIT) added 8.9%, and Washington Mutual ( WM) was better by 3.7%.

Merrill Lynch ( MER) rose 5.1% to close at $54.69 even though The New York Times reported that the broker will post a larger-than-expected writedown of $15 billion when it reports earnings next week. Shares of Merrill had been down earlier.

Financial subsector indices were mixed. The KBW Bank Index and the Amex Securities Broker/Dealer Index both advanced 0.3%. The NYSE Financial Sector Index was off 0.9%.

As for Countrywide, which surged 51% in the last session on a report it was about to be bought, it was down 18.3% to finish at $6.33 this time. Bank of America agreed to buy the lender for $4 billion, or $7.16 a share. That's more than 7.5% below its closing price but 40% above where the stock was before the prospect of a takeover was reported. BofA was fractionally weaker.

Elsewhere, Citigroup ( C) was on the winning side, rising 1.6% to $28.56 amid speculation it might be close to getting a multibillion cash infusion from an investor or investment group, possibly Saudi billionaire Prince Alwaleed.

Among analyst ratings changes, JPMorgan Chase upped Dow member Honeywell ( HON) to neutral from underweight and Dell ( DELL) to overweight from neutral. Also on the positive side, Stifel Nicolaus raised its rating for Caterpillar ( CAT) to buy from hold.

On the downside, Deutsche Securities cut several stocks to sell, including Gold Fields ( GFI), Harmony Gold ( HMY) and Anglogold ( AU).

Traders were also digesting a spate of economic data. Before the open, the Labor Department said its import price index was unchanged in December, compared with a revised 3.3% rise in November. The data matched economists' expectations.

Separately, the Commerce Department said the trade deficit swelled in November to $63.1 billion from $57.8 billion in October. The figure was above the consensus of $59.5 billion and was the biggest trade gap since September 2006.

Commodity futures were in focus as crude oil continued to slide and gold prices were setting records. Oil was down $1.02 at $92.69 a barrel. Gold briefly topped $900 an ounce, and closed up $4.10 at $897.70 an ounce.

U.S. Treasury prices were on the march higher. The 10-year note rose 27/32 in price, yielding 3.79%. The 30-year bond added 1-8/32 in price, yielding 4.38%. The dollar, meanwhile, lost ground against the world's major currencies.

Overseas markets were mostly lower. Overnight in Asia, Japan's Nikkei 225 slid 1.9%, and Hong Kong's Hang Seng was weaker by 1.3%. Among European bourses, London's FTSE 100 slipped 0.3%, while Germany's Xetra Dax tacked on 0.1%.