Stocks slid to a 12-year low on Friday as a move by the U.S. government to take a large common equity stake in embattled lender Citigroup sowed more uncertainty over the fate of major banks.

Additionally, government data showed that the recession deepened in the fourth quarter, with the economy shrinking at an annual rate of 6.2 percent, worse than initially estimated.

Investors pummeled bank shares, sending Citigroup down more than 28 percent and Bank of America off more than 8 percent, as they fretted over which other banks might see similar action as Washington grapples to stabilize the banking sector and fears persist that aid could dilute shareholders.

There are still a lot of unknowns about Citi and I think there's just general fear that this is the first step in nationalization of Citigroup, said Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hill, New York. Equity holders are worried their stakes will be worth nothing eventually.

The Dow Jones industrial average <.DJI> fell 92.31 points, or 1.29 percent, to 7,089.77. The Standard & Poor's 500 Index <.SPX> declined 12.60 points, or 1.67 percent, to 740.23. The Nasdaq Composite Index <.IXIC> shed 5.50 points, or 0.40 percent, to 1,385.97.

The KBW Bank index <.BKX> slid 3.9 percent.

Early Friday, the U.S. Treasury said it would convert dollar-for-dollar its $25 billion worth of preferred shares in Citigroup to match conversions by private preferred holders in a bid to strengthen its lender's capital base but this does not involve pumping more government cash into it.

Right after the market open, the S&P 500 fell to its lowest since April 1997. The intraday low of 734.52 also marked the broader market's fresh bear market low.

Energy shares fell along with oil prices, with Exxon Mobil Corp off 1.7 percent at $69.72, as U.S. front-month crude declined nearly 4 percent to $43.51 a barrel.

On Nasdaq biotechnology shares dragged, continuing a sell-off from Thursday sparked by worries healthcare provisions in the Obama administration's budget proposal might hurt profitability. Gilead fell 1.5 percent to $46.36.

But big-cap technology shares edged higher, helping Nasdaq to briefly turn positive.

(Additional reporting Edward Krudy; Editing by James Dalgleish)