Stocks dipped on Friday as a move by the U.S. government to take a large stake in common shares of embattled Citigroup fanned fears it will take a bigger role in overseeing some troubled major banks.

Citigroup shares tanked 38 percent to $1.52 while Bank of America stock slumped more than 24 percent to $4.00.

Healthcare and drug companies fell for a second day on worries that U.S. President Barack Obama's budget proposal will strangle profits as he tries to rein in healthcare costs.

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.

Although the U.S. Treasury is not infusing Citigroup with any new capital, it would convert up to $25 billion in preferred shares to common stock in its third attempt to prop up the bank in the past five months.

The Dow Jones industrial average <.DJI> dropped 33.77 points, or 0.47 percent, to 7,148.31. The Standard & Poor's 500 Index <.SPX> fell 7.73 points, or 1.03 percent, to 745.10. The Nasdaq Composite Index <.IXIC> gained 1.69 points, or 0.12 percent, to 1,393.16.

The KBW Bank index <.BKX> dropped 7.3 percent.

When you see Citigroup continuing to sink, the fear is that nobody quite knows how the government is going to impact the company and its competitive position and (there is) a fear they might not handle it well, said Tim Ghriskey, Chief investment officer at Solaris Asset Management in Bedford Hills, New York.

Citigroup will then be at a competitive disadvantage and the end result might (be) a total government takeover.

General Electric , which operates a large financing unit, also weighed on financials after it said it would slash its dividend to 10 cents a share from 31.

GE shares fell 4 percent to $8.73.

On Nasdaq, big-cap techs including iPod maker Apple Inc and Google Inc helped lift the index, rising over 1 percent.

Biotechs Celgene and Gilead Sciences were the top drags, falling 7.7 and 3.8 percent, respectively. The AMEX Biotechnology index <.BTK> shed 2.7 percent.

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)

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