Stocks fell on Friday, ending four weeks of back-to-back gains, as political instability resurfaced in Europe and investors braced for a confidence vote in Greece after U.S. markets close.
The vote on Greek Prime Minister George Papandreou leaves the fate of a $130 billion bailout deal hanging in the balance. Investors are once more chewing over worst-case scenarios after markets were again engulfed by volatility less than a week after a framework solution to Greece's woes had been agreed.
The problem for investors is that any result of the confidence vote is unlikely to end the uncertainty hanging over Greece and the euro zone. Instead, it will probably begin a protracted political and diplomatic process.
Stock sectors most exposed to weakness in European banks and tied to economic growth, such as industrials and financials, were among the weakest. The S&P's financial index led losses, falling 1.4 percent on the day.
Jack Ablin, chief investment officer at Harris Private Bank in Chicago, who met with economists in Athens, said he believes Greece is on a slow, painful road to abandoning the euro, an outcome that could bring months of uncertainty.
My main conclusion is that, strip away the debt and everything else, having Greece in the euro is untenable, he said. More and more Greeks are realizing that moving back to the drachma is not such a bad thing.
As the Group of 20 industrialized nations met, Germany made little progress convincing other countries to contribute to the European rescue fund. Italy, facing its own debt problems, agreed to monitoring by the International Monetary Fund.
The Dow Jones industrial average dropped 61.23 points, or 0.51 percent, to 11,983.24. The Standard & Poor's 500 Index lost 7.92 points, or 0.63 percent, to 1,253.23. The Nasdaq Composite Index fell 11.82 points, or 0.44 percent, to 2,686.15.
For the week, the Dow fell 2 percent while the S&P was off 2.5 percent and the Nasdaq lost 1.9 percent.
Although the S&P 500 has rallied 14 percent since its October low to the upper end of its recent trading range, the market has struggled to move higher as the outlook for Europe continues to be murky.
Financial shares slumped, with the KBW capital markets index down 0.9 percent.
Shares of Jefferies Group Inc lost as much as 7.4 percent after a brokerage cut Jefferies target price but said it was being unjustly punished over the European debt crisis.
To quell speculation, Jefferies said it has no meaningful credit risk to Portugal, Italy, Ireland, Greece and Spain. The shares recovered to end up 0.5 percent at $12.07 after losing nearly 20 percent this week.
Volume was light, with only 7 billion shares traded on the NYSE, the Amex and the Nasdaq, reflecting hesitation about developments in Europe.
David Lutz, a trader at Stifel Nicolaus Capital Markets, Baltimore, said traders closing out short bets in the case of a favorable outcome lifted the market somewhat into the close.
People are probably going to be taking positions off going into the bell and the Street is probably pretty short, he said.
The Group of 20 meeting got off to a rocky start. German Chancellor Angela Merkel said hardly any countries in the group
are willing to participate in the euro zone bailout fund, throwing cold water on plans to stabilize Europe's sovereign debt crisis.
The crisis again overshadowed U.S. economic data. A Labor Department report showed the U.S. unemployment rate hit a six-month low in October and job gains in the prior two months were stronger than previously thought, pointing to some improvement in the still-weak labor market.
The PHLX Europe sector index, which includes major European shares, dropped 2.3 percent.
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 benchmark index posted its first negative week in five after closing on Monday with its best month in 20 years.
In a move to make its deficit targets credible, Italy agreed to let the IMF 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 finances.
(Reporting by Edward Krudy; Editing by Kenneth Barry)