Stocks fell on Friday as gains from an unexpectedly strong jobs report were quickly overwhelmed by fears of more fallout from the credit crisis.

Shares of Merrill Lynch dropped 7 percent to a two-year low on concern that the investment bank's results do not fully reflect its exposure to subprime-related losses.

Stocks fell sharply on Thursday after a confidence-shaking analyst downgrade of Citigroup, wiping out gains made Wednesday after the Federal Reserve cut U.S. interest rates.

I think the market rallied on the first Fed cut because they thought that they could see to the back side of the subprime mess. said Jim Fehrenbach, head of Nasdaq trading at Piper Jaffray in Minneapolis. With the Merrill news and the news on Citi yesterday, people are realizing this is far from over, and there is not going to be a quick fix and there's still more uncertainty than anybody would like.

The Dow Jones industrial average was down 86.33 points, or 0.64 percent, at 13,481.54. The Standard & Poor's 500 Index was down 11.54 points, or 0.77 percent, at 1,496.90. The Nasdaq Composite Index was down 15.71 points, or 0.56 percent, at 2,779.12.

Merrill stock fell 7.3 percent to $57.65 after the Wall Street Journal reported the brokerage may have used deals with hedge funds to delay losses on troubled assets. Merrill was not available for comment.

Shares of Goldman Sachs dropped 4.1 percent to $230.49 and Citigroup was down 1.8 percent to $37.83.

The S&P financial sector index was at its lowest since June 2006.

U.S. employers created 166,000 nonfarm jobs in October, the Labor Department said, more than double economists' median forecast of 80,000 new jobs.

U.S. third-quarter GDP grew at a 3.9 percent annual rate, the fastest pace since the beginning of 2006, according to a government report Wednesday.

Stocks had no reaction to a report showing new orders at U.S. factories surprisingly rose 0.2 percent in September, according to a Commerce Department report. Analysts polled by Reuters were expecting orders to decline 0.5 percent.

(Additional reporting by Caroline Valetkevitch)