Stock index futures fell on Friday, weighed by a drop in financial shares following news that the U.S. government is taking a large common equity stake in embattled lender Citigroup .

Investors fretted over which other banks might see similar action as Washington grapples to stabilize the banking sector and worries persist about dilution of current shareholders.

In an early-morning announcement, the U.S. Treasury Department said it would convert dollar-for-dollar its $25 billion worth of preferred shares to match conversions by private preferred holders in a bid to strengthen Citigroup's capital base.

Shares of Citigroup dropped 44 percent to $1.37 before the bell, while shares of Bank of America shed 17 percent to $4.41. JPMorgan was down 4.8 percent to $21.95.

I don't think this (deal) is good news. But I haven't heard good news in 24 months. I don't think I'm going to for a lot longer than that, said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey. We are talking about a form of nationalization.

S&P 500 futures fell 9.20 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures tumbled 77 points, and Nasdaq 100 futures lost 11.75 points.

The Citigroup share conversion does not involve pumping more government cash into the bank.

There was also caution ahead of key economic reports, including one that may show that the U.S. economy contracted more than initially thought in the fourth quarter.

The gross domestic product data is due at 8.30 a.m., while a report on consumer sentiment is due at 9.55 a.m..

(Additional reporting by Ryan Vlastelica; Editing by James Dalgleish)