A drop in manufacturing activity in May also weighed on the market, squelching investors' hopes that business in general will improve by the end of the year. The Federal Reserve reported that output at U.S. factories, utilities and mines fell 0.8 percent in May, falling for the eighth consecutive month.
"Across industry groups we continue to see warnings. And, that has completely brought into question whether the economy was in the process of bottoming, and whether we are now going to see a turnaround in the second half (of 2001)," said Todd Clark, co-head of trading at WR Hambrecht.
In afternoon trading, the Dow Jones industrial average was off 2.28 at 10,687.85, after dropping 123 points earlier.
The broader market was also lower. The Nasdaq composite index slipped 11.59 to 2,032.48, and the Standard & Poor's 500 index was down 1.41 at 1,218.46.
The expiration of stock futures and options Friday, a quarterly occurrence called triple witching, also contributed to the downturn. Triple witching, even in bull markets, can lead to sharp declines and higher volume, both of which were apparent in Friday's session.
By mid-afternoon, when the indexes had recovered from their lows of the day, analysts said triple witching could have been what was keeping the market down.
Stocks did advance briefly Friday on the notion that the economic picture is so weak right now that the Federal Reserve Board could slash interest rates by another half a percentage point at its meeting June 26-27. The Fed, which has lowered rates five times this year by a total of 2.5 percentage points to spur the economy, had been expected to cut rates by another quarter of a point.
Aside from the prospect of a larger-than-expected rate cut, investors had no reason to buy stocks Friday, especially in the high-tech sector.
Tech stocks suffered from an earnings warning from Nortel that followed a warning late Thursday by JDS Uniphase.
Nortel, a network equipment maker, also announced plans to cut another 10,000 jobs on top of 20,000 cuts announced earlier this year. Nortel slipped $1.20 to $9.40, while JDS Uniphase, which makes fiber optic equipment, fell $1.69 to $12.12 Friday.
Investors also sold off shares of companies that make fiber optic networking equipment. Corning was down $1.30 at $14.70.
The prospect of weaker earnings prompted other tech losses. Cisco Systems, which analysts fear will issue its own profit warning, fell 79 cents to $16.95.
Bad news about earnings also hurt the Dow with McDonald's falling $1.46 to $28.50 after reducing its second-quarter forecasts. Wall Street was particularly unnerved by McDonald's third consecutive profit warning, because the fast-food company is among the blue chip firms known for growing consistently.
The market was also unsettled by a rise in consumer inflation, the latest proof that the economy is quite weak. Consumer inflation rose by a seasonally adjusted 0.4 percent in May, reflecting a big jump in gasoline and electricity costs, according to the Labor Department. The latest reading, up from a 0.3 percent increase in April, matched analysts' expectations.
Reports confirming the economy's weakness -- from high unemployment to high costs for companies to produce good to inventory levels that are still quite high -- contributed to Thursday's big selloff, as well.
In the past three weeks, the market has been giving back gains reaped in its big April-May rally in which the Dow climbed about 20 percent. Analysts now say that advance was too much, too soon.
"It was based on vapor. There was no evidence of a turnaround in the economy or earnings," said Bernie Schaeffer, chairman of Schaeffer's Investment Research Inc. in Cincinnati.
The market's major indicators have fallen considerably this week. The Nasdaq has posted the biggest decline, off 8.2 percent. The Dow is off 2.6 percent and the S&P is down 3.7 percent.
After suffering a 181-point loss Thursday, the Dow had a loss for the year, having closed at 10,787.99 on Dec. 31.
Declining issues narrowly outnumbered advancers 15 to 13 Friday on the New York Stock Exchange where volume was 839.37 million shares, ahead of 560.53 million at the same point Thursday.
The Russell 2000 index, which gauges the performance of smaller companies stocks, inched up 0.40 to 495.78.
Overseas markets were lower Friday. Japan's Nikkei stock average ended the day down 0.4 percent. In Europe, Germany's DAX index fell 1.7 percent, Britain's FT-SE 100 slipped 0.5 percent, and France's CAC-40 lost 1.0 percent.