Stocks Tumble After Bear Stearns Bailout

"The stock market is increasingly catching up with signals from the bond market. Somehow the stock market could delude itself into thinking that they have nothing to do with the mortgage fallout," she said.

Comments from the Fed might have helped corral some of investors' nervousness Friday. The central bank said it voted unanimously to sign off on the arrangement between JP Morgan and Bear Stearns and that it is ready to provide further resources to stave off further credit troubles. Fed Chairman Ben Bernanke also said Friday he would do what was possible to aid struggling homeowners.

Still, investors remained nervous. The Chicago Board Options Exchange's volatility index, known as the VIX, and often referred to as the "fear index," jumped 18.7 percent.

Declining issues outnumbered advancers by about 7 to 1 on the New York Stock Exchange, where volume came to 1.19 billion shares.

"The Bear Stearns news reversed the early positive sentiment from the inflation data," said Peter Cardillo, chief market economist at Avalon Partners. "There had been nervousness about Bear Stearns for some time and now the market's concerns about the company have been proven true."

Friday's stock market pullback comes a day after an anxious stock market rebounded from an early plunge following a Standard & Poor's prediction that financial companies are nearing the end of the massive asset write-downs that have pummeled the stock and credit markets for months. The S&P projection had given investors some hope that the seemingly unrelenting losses from the mortgage and credit crisis could have been bottoming out.

Bear Stearns' woes rekindled investors' nervousness about the troubles in the financial sector. The company's shares skidded $22.32, or 40 percent, to $34.68, while JP Morgan fell $1.53, or 4 percent, to $36.58.

Other financial names declined as well. Lehman Brothers Holdings Inc. fell $6, or 13.1 percent, to $39.99 and Merrill Lynch & Co. slid $2.67, or 5.8 percent, to $43.59.

Stock market investors Friday were also eyeing the dwindling dollar and events in the soaring commodities market. Gold prices touched another fresh record Friday.

Light, sweet crude, which set a fresh record Thursday, fell 22 cents to $110.11 per barrel on the New York Mercantile Exchange.