Stocks fell on Friday, as shares of large multinationals sensitive to the dollar fell in sync with the euro on the euro zone's debt problems and retailers lost ground after a weak profit outlook from Gap.

Gap Inc plummeted 16.5 percent to $19.44 after slashing its full-year profit outlook late Thursday, saying higher price tags will not be enough to offset rising cotton costs.

But earlier declines were pared as energy shares rebounded along with crude oil prices, which rose 0.7 percent after falling as much as 2.5 percent earlier in the session.

Euro -- it's all about the euro. Keep in mind, your other problem out there is that as the dollar strengthens, your multinational dollar-sensitive, large cyclical companies go down also, said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

So it's not just the commodity stocks. It's those capital goods stocks that are (also) dollar sensitive.

The euro lost nearly 1 percent over disagreements on how to handle debt problems in Greece and ahead of a Spanish regional election.

Caterpillar Inc shed 0.4 percent to $104.90. The S&P Cap Goods sector index <.15GSPIC> lost 0.7 percent.

In the options market, the predominant activity favored more bearish bets than have been seen over the past month.

Ahead of options expiration at Friday's close, traders had exchanged about 194,000 contracts on the S&P 500 <.SPX> as puts outpaced calls by a ratio of 3.33:1 by 10:43 a.m. EDT, according to options analytics firm Trade Alert. That is higher than the 22-day moving average of 1.67 for the SPX put-to-call ratio.

The Dow Jones industrial average <.DJI> dropped 40.45 points, or 0.32 percent, to 12,564.87. The Standard & Poor's 500 Index <.SPX> shed 5.13 points, or 0.38 percent, to 1,338.47. The Nasdaq Composite Index <.IXIC> fell 9.82 points, or 0.35 percent, to 2,813.49.

But Barnes & Noble Inc shares jumped 30.2 percent to $18.37 after John Malone's Liberty Media Corp proposed buying the company for $1.02 billion. The largest U.S. bookstore chain put itself up for sale nine months ago.

The S&P Retail index <.RLX> fell 1.1 percent.

(Reporting by Chuck Mikolajczak; Additional reporting by Doris Frankel; Editing by Jan Paschal)