U.S. stocks fell more than 1 percent on Friday as a possible debt default by a Dubai state-owned conglomerate increased investors' uncertainty about the financial system's strength.

U.S. stocks sold off broadly, sliding 2 percent or more at the opening, but selling was concentrated mainly in the financial and commodity-linked sectors as investors pared positions in areas of the market most sensitive to economic uncertainty.

But by midday, the flight to less risky assets seemed to be subsiding, helping the major U.S. stock indexes recover from intraday lows. The U.S. dollar, which had jumped sharply as investors looked for a safe haven, pared gains and commodity prices stabilized.

Fears of a contagion effect from Dubai appeared to be ebbing among investors.

There were some big concerns overseas yesterday that you might see a mushrooming effect from the Dubai World credit problems. But at least so far in the U.S. markets, a lot of that has been shrugged off, said Michael James, senior trader at Wedbush Morgan, a regional investment bank in Los Angeles.

The Dow Jones industrial average <.DJI> dropped 121.53 points, or 1.16 percent, to 10,342.87. The Standard & Poor's 500 Index <.SPX> fell 14.92 points, or 1.34 percent, to 1,095.71. The Nasdaq Composite Index <.IXIC> lost 26.12 points, or 1.20 percent, to 2,149.93.

At its session low, the Dow touched 10,231.25 earlier in the day, when the S&P 500 fell as low as 1,083.74, and the Nasdaq dropped as low as 2,113.99.

On Wednesday, Dubai said it would ask creditors of state-owned Dubai World and Nakheel, the builder of its palm-shaped islands, for a standstill agreement as a first step toward restructuring billions of dollars of debt.

On Thursday, U.S. financial markets were closed for the Thanksgiving holiday in the United States.

But financial markets around the world shuddered, reflecting fears about the impact of a potential Dubai debt default.

Friday's U.S. stock trading session is abbreviated, with the market close set at 1 p.m. (1800 GMT).

(Reporting by Edward Krudy; Editing by Jan Paschal)