U.S. stocks extended a rout on Friday after a top U.S. senator confirmed the market's worse fears, saying it may be necessary to nationalize some banks, as the S&P 500 closed in on an almost 12-year low.

Senate Banking Committee Chairman Christopher Dodd said the nationalization of some banks could be needed at least for a short time, according to a Bloomberg report.

The S&P briefly fell more than 3 percent and the Dow industrials hit six-year lows as mounting alarm sent investors scurrying to the relative safety of U.S. government bonds and gold, which rose briefly above $1,000 an ounce.

Shares of Bank of America , Citigroup and Wells Fargo & Co all fell more than 20 percent. Their decline contributed to a 7.5 percent drop in the KBW Banks index <.BKX>, bringing it down more than 50 percent since the start of the year.

The nationalization question is what everybody is focused on right now. Whether Bank of America and Citi will be nationalized by the government for a period of time before they can privatize them again, said Angel Mata, managing director of listed equity trading at Stifel Nicolaus Capital Markets in Baltimore.

Bank of America, the largest U.S. bank by assets, said in a statement it saw no reason to nationalize a bank that is profitable, well capitalized and actively lending. Citigroup said its capital base is very strong, and two people close to the bank said Citi is not having conversations with the U.S. government about nationalization.

The Dow Jones industrial average <.DJI> was down 192.83 points, or 2.58 percent, at 7,273.12. The Standard & Poor's 500 Index <.SPX> was down 21.92 points, or 2.81 percent, at 757.02. The Nasdaq Composite Index <.IXIC> was down 22.85 points, or 1.58 percent, at 1,419.97.

Shares of General Electric , the conglomerate whose businesses include a big financial unit, hit their lowest level since 1995, trading down 7 percent to $9.35.

Adding to the market's gloom, a more than 2 percent drop in oil prices helped send Chevron down 2 percent to $65.33.

The Dow's fall to fresh bear market lows on Thursday has investors worried that the benchmark S&P 500 <.SPX> may be about to fall through its bear-market lows set in late November.

The backdrop for the latest damage in the market is the failure last week by U.S. Treasury Secretary Timothy Geithner to restore confidence in the financial system when he unveiled a financial sector rescue that fueled uncertainty about how banks would be relieved of their toxic assets.

Additionally there are concerns that the $787 billion economic stimulus signed into law by U.S. President Barack Obama this week might not blunt the impact of the recession soon enough.

Even so, bargain hunting in the technology sector lifted shares of semiconductor companies on Friday, which helped limit Nasdaq's losses. Intuit Inc was among the index's standouts, up more than 13 percent to $24.14 after it posted a smaller-than-expected drop in quarterly profit.

A broker upgrade on AT&T and Verizon lifted telecoms. The S&P telecom services index <.GSPL> rose 0.5 percent and was the only positive sector in the broad index.

(Editing by Leslie Adler)