Wall Street gave up much of its early gains on Friday as signs of weakness in the U.S. economy and concern over European bank stress tests outweighed strong earnings from Google and Citigroup.

A report showing U.S. consumer sentiment slipped in July to its lowest level since March 2009, a weak reading from the manufacturing sector in New York state, and anticipation of the bank stress tests results due later on Friday weighed on sentiment.

We expect it to continue to be a roller coaster, driven by the European stress test, the U.S. debt and tax agreements ... and earnings, said Kim Caughey Forrest senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

Consumer discretionary stocks were among the biggest drags. Home Depot fell 0.7 percent, while the S&P 500's discretionary index <.GSPD> fell 0.3 percent.

The Dow Jones industrial average <.DJI> dropped 17.30 points, or 0.14 percent, to 12,419.82. The Standard & Poor's 500 Index <.SPX> dropped 0.01 points, or 0.00 percent, to 1,308.86. The Nasdaq Composite Index <.IXIC> gained 9.44 points, or 0.34 percent, to 2,772.11.

Google Inc's earnings beat the most bullish forecasts, sending its shares up 12 percent and lifting the Nasdaq. Citigroup Inc posted higher net income, helped by falling credit losses. The stock rose 0.7.

Two large merger offers also helped to put a floor in the market. BHP Billiton's $12 billion offer to purchase Petrohawk lifted shares in the energy sector, and investor Carl Icahn's offer to buy Clorox Co for $10.2 billion pushed those shares 6.4 percent higher.

BHP Billiton's bid for Petrohawk, which jumped 63 percent, drove up shares in the energy sector as investors speculated more deals ahead. Chesapeake Energy rose 6.4 percent to $32.14, while the Select Sector Energy Select Sector SPDR exchange traded fund rose 1.5 percent to $75.94.

Europe's sovereign debt crisis, stalled budget talks in Washington and an uncertain economic backdrop have sent stocks on a roller coaster ride since the spring. That volatility was set to continue on Friday afternoon.

A health check of European banks is expected to show that as many as 15 lenders need more capital to withstand a prolonged recession, with criticism growing that the tests do not encompass the impact of a Greek default.

As deadlock in Washington's budget talks sets in, ratings agency Standard & Poor's warned there was a 1-in-2 chance it could cut the United States' top rating if a deal to raise the government debt ceiling is not reached soon.

U.S. consumer sentiment deteriorated in early July to the lowest level since March 2009 on increasing pessimism over falling income and rising unemployment, the Thomson Reuters/University of Michigan survey showed.

(Additional reporting by Angela Moon; Editing by Padraic Cassidy)