U.S. stocks slid on Friday after another warning from a Federal Reserve official about inflation, giving investors more reason to think the Fed will keep raising interest rates.
Some investors were locking in gains after a two-day rally which saw the Dow gain more than 300 points, traders said.
Declines in shares of big interest-rate-sensitive financial services companies such as Bank of America Corp., Citigroup Inc. and American Express Co. helped pull the Dow and S&P indexes lower.
William Poole, president of the Federal Reserve Bank of St. Louis, said pressure from high energy prices could mean that U.S. inflation is greater than what has appeared in data and that the Fed would respond to persistent inflation with policies that keep it from rising further.
The market has been volatile the entire week and despite the gains we've seen in the past two days, it seems investors just don't want to commit long positions ahead of the weekend, said Ed Yardeni, chief investment strategist at Oak Associates Ltd. in Akron, Ohio.
Some shares got cheap and investors were bargain hunting, but that does not change the fact the Fed is going to raise rates at its next meeting and that will keep pressuring stocks.
The Dow Jones industrial average was up 12.80 points, or 0.12 percent, at 11,027.99. The Standard & Poor's 500 Index was down 3.46 points, or 0.28 percent, at 1,252.70. The Nasdaq Composite Index was down 10.60 points, or 0.49 percent, at 2,133.55.
Shares of Microsoft Corp. were the most heavily traded on Nasdaq but were little changed after the software maker said Chairman Bill Gates will cut back his day-to-day role at the company.
Microsoft rose 0.8 percent to $22.24.
New measures by China to restrict credit and keep its economy from overheating caused fears among investors that U.S. corporate earnings growth could slow.
Friday's drop caused the market to pull back after two sessions of strong gains following a month-long sell-off that roiled the U.S. stock market.
Traders said market volatility increased as the two-day quadruple witching period in which futures and options expire came to an end, causing investors to adjust their positions.
Apple Computer Inc. fell after sources familiar with the matter said Microsoft is developing a music and video device to compete with Apple's iPod and music service. Apple shares were off 2.3 percent at $58.04.
On the economic data front, a report showed U.S. consumer sentiment unexpectedly rose in June.
Bank of America shares slid 0.8 percent to $47.54, Citigroup was off 0.7 percent at $48.33 and American Express lost 1.2 percent to $52.91.
(Additional reporting by Vivianne Rodrigues)