U.S. stocks fell in morning trading on Friday after two days of steep gains as richer nations appeared to back away from a European Union plan to broaden funding for a euro zone bailout fund.
A mixed report on the U.S. labor market was expected to keep trading volatile going into the weekend.
German Chancellor Angela Merkel said hardly any countries in the Group of 20 industrialized nations are willing to participate in the euro zone bailout fund, throwing cold water over plans to stabilize Europe's sovereign debt crisis.
Merkel's announcement shows the failure of global leaders on how to deal with the debt crisis, said Rick Meckler, president of investment firm LibertyView Capital Management in New York.
Financial shares were the worst performing on Wall Street, with the KBW capital markets index down 2.3 percent.
Shares of Jefferies Group Inc tumbled more than 7 percent after brokerage Keefe, Bruyette & Woods cut Jefferies target price but said the investment bank is being unjustly punished over perceived exposure to the European debt crisis.
The focus on developments from Europe has kept stock trading volatile, with the S&P 500 index swinging more than 1.5 percent every day this week. The index is on track to post its first negative week in five after closing on Monday its best month in 20 years.
The Dow Jones industrial average was down 178.88 points, or 1.49 percent, at 11,865.59. The Standard & Poor's 500 Index was down 21.03 points, or 1.67 percent, at 1,240.12. The Nasdaq Composite Index was down 40.94 points, or 1.52 percent, at 2,657.03.
In a move to make its deficit targets credible, Italy agreed to have the International Monetary Fund monitor the country's progress with long delayed reforms of pensions, labor markets and privatization. Italy's debt burden could be the market's next target after a resolution of Greece's crisis.
A government report showed the U.S. economy added fewer jobs than expected in October, but a fall in the jobless rate to a six-month low and upward changes to prior months' job gains pointed to underlying strength in the labor market.
It's not a game-changer, but when you take into account the upward revision to prior months and the drop in the unemployment rate, it's a step in the right direction, said John Canally, economic strategist at LPL Financial in New York.
Equities earlier held to the previous day's gains after Greece called off a referendum that could have threatened its membership in the euro zone, easing concerns about a Greek default.
Investors retained some appetite for equities as Groupon Inc raised $700 million in an initial public offering, making it the largest IPO by an Internet company since Google Inc in 2004.
(Reporting by Rodrigo Campos, additional reporting by Emily Flitter; Editing by Padraic Cassidy)