U.S. stocks dipped on Friday as a move by the U.S. government to take a large common equity stake in embattled Citigroup sowed more uncertainty over the fate of banks and grim economic data weighed on trading.

An early descent in some parts of the market to 12-year lows lured bargain hunters into technology and other sectors, however, helping the Nasdaq and Dow to briefly turn positive.

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 the ailing lender's capital base, but this does not involve pumping in more government cash.

Even so, worries about banks continued to weigh, with Citigroup's shares down more than 38 percent to $1.52, and Bank of America stock down 18 percent to $4.36.

Investors fretted over whether other banks might go the same way as Citigroup as the Obama administration tries to stabilize the banking sector, and fears persisted that more government aid could dilute existing common shareholders.

I think people want to be more positive and view the Citigroup news as disturbing but not unexpected and so when we were gapping down as much as we were, early buyers were willing to step in, said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles, but added:

I think there's still a lot of uncertainty about the ability of the strength that we've seen to hold into the end of the day.

The Dow Jones industrial average <.DJI> was down 39.90 points, or 0.56 percent, at 7,142.18. The Standard & Poor's 500 Index <.SPX> was down 7.55 points, or 1.00 percent, at 745.28. The Nasdaq Composite Index <.IXIC> was down 3.11 points, or 0.22 percent, at 1,388.36.

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

Since the market's October 2007 record high, the Dow Jones Wilshire 5000 index <.DWCF> -- one of the broadest measures of U.S. stocks -- is down more than 50 percent or about $10 trillion.

A lower close on Friday would mark the S&P 500's fifth down month in six and the biggest drop since October.

(Editing by James Dalgleish)