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Increased instability in the Middle East drove up the CBOE Volatility Index .VIX, the stock market's fear gauge, as investors scrambled for protective positions.

"The market hates uncertainties, especially geopolitical ones, and based on how that shapes up throughout the weekend (in Egypt), next week's trading will be impacted," said Thomas Nyheim, portfolio manager for Christiana Bank & Trust Co in Greenville, Delaware.

Trading volume was the highest of the year at 9.97 billion shares on the New York Stock Exchange, the American Stock Exchange and Nasdaq, compared to last year's estimated daily average of 8.47 billion shares.

The market drop ended the Dow's eight-week winning streak and pushed the S&P 500 below its 14-day moving average for the first time in two months. Disappointing results from Amazon.com

(AMZN.O) and Ford (F.N) further added to the gloom.

Developments in the Middle East could be a trigger for investors to sell at a time when many expected a correction after a market rally of about 18 percent since September.

"I think the next two to three weeks, the crisis in Egypt and potentially across the Middle East, might be an excuse for a big selloff of 5 to 10 percent," said Keith Wirtz, president and chief investment officer at Fifth Third Asset Management in Cincinnati, Ohio.

Nasdaq quotations for its main stock indexes suffered an outage of nearly one hour at the open, causing confusion among traders. Nasdaq OMX Group (NDAQ.O) blamed a glitch with its global index data service.

The Dow Jones industrial average .DJI ended down 166.13 points, or 1.39 percent, at 11,823.70. The Standard & Poor's 500 Index .SPX was down 23.20 points, or 1.79 percent, at 1,276.34. The Nasdaq Composite Index .IXIC fell 68.39 points, or 2.48 percent, at 2,686.89.

For the week, the Dow fell 0.4 percent, the S&P lost 0.5 percent and the Nasdaq dipped 0.1 percent.

Amazon.com (AMZN.O) shares slipped 7.2 percent to $171.14, a day after the online retailer recorded revenue below the consensus view.

Ford Motor Co (F.N) slumped 13.4 percent to $16.27 after a steep drop in quarterly profit. Rival automaker General Motors Co (GM.N) also lost 5.4 percent to $36.60.

Dow component Microsoft Corp (MSFT.O) also fell 3.9 percent to $27.75 a day after its profit dipped.

In Egypt, President Hosni Mubarak sent troops and armored

Increased instability in the Middle East drove up the CBOE Volatility Index .VIX, the stock market's fear gauge, as investors scrambled for protective positions.

"The market hates uncertainties, especially geopolitical ones, and based on how that shapes up throughout the weekend (in Egypt), next week's trading will be impacted," said Thomas Nyheim, portfolio manager for Christiana Bank & Trust Co in Greenville, Delaware.

Trading volume was the highest of the year at 9.97 billion shares on the New York Stock Exchange, the American Stock Exchange and Nasdaq, compared to last year's estimated daily average of 8.47 billion shares.

The market drop ended the Dow's eight-week winning streak and pushed the S&P 500 below its 14-day moving average for the first time in two months. Disappointing results from Amazon.com

(AMZN.O) and Ford (F.N) further added to the gloom.

Developments in the Middle East could be a trigger for investors to sell at a time when many expected a correction after a market rally of about 18 percent since September.

"I think the next two to three weeks, the crisis in Egypt and potentially across the Middle East, might be an excuse for a big selloff of 5 to 10 percent," said Keith Wirtz, president and chief investment officer at Fifth Third Asset Management in Cincinnati, Ohio.

Nasdaq quotations for its main stock indexes suffered an outage of nearly one hour at the open, causing confusion among traders. Nasdaq OMX Group (NDAQ.O) blamed a glitch with its global index data service.

The Dow Jones industrial average .DJI ended down 166.13 points, or 1.39 percent, at 11,823.70. The Standard & Poor's 500 Index .SPX was down 23.20 points, or 1.79 percent, at 1,276.34. The Nasdaq Composite Index .IXIC fell 68.39 points, or 2.48 percent, at 2,686.89.

For the week, the Dow fell 0.4 percent, the S&P lost 0.5 percent and the Nasdaq dipped 0.1 percent.

Amazon.com (AMZN.O) shares slipped 7.2 percent to $171.14, a day after the online retailer recorded revenue below the consensus view.

Ford Motor Co (F.N) slumped 13.4 percent to $16.27 after a steep drop in quarterly profit. Rival automaker General Motors Co (GM.N) also lost 5.4 percent to $36.60.

Dow component Microsoft Corp (MSFT.O) also fell 3.9 percent to $27.75 a day after its profit dipped.

In Egypt, President Hosni Mubarak sent troops and armored

* U.S. gross domestic product (GDP) figures, due at 8:30 a.m. ET, will be closely watched for evidence of the pace of economic recovery, a day after mixed U.S. data showed strength in the housing sector though unemployment benefit claims rose more than expected.

* Economists expected fourth-quarter GDP numbers to show growth picking up speed by an annual rate of 3.5 percent, though short of the pace needed to lower unemployment significantly.

* Strong corporate earnings led Wall Street to a 29-month closing high for a second day on Thursday, though another run of big gains may be harder to achieve.

* Microsoft Corp (MSFT.O) surprised Wall Street with a better-than-expected profit, but its shares stayed flat as investors expressed concern about the weakness of computer sales.

* Shares in Amazon.com (AMZN.O) fell 9.8 percent in extended trading after the world's biggest online retailer said its profit margins were sliding as it spends money on massive new distribution centers and acquisitions.

* Among companies to report earnings on Friday include Ford Motor Company (F.N), Honeywell (HON.N) and Chevron (CVX.N).

* Thomson Reuters data showed 71 percent of the S&P 500 .SPX companies that have reported earnings so far have beaten estimates.

* LinkedIn Corp announced plans to go public this year in what could be a test of investor appetite for social networking websites ahead of a highly anticipated Facebook offering.

* North American smartphone vendors Apple (AAPL.O) and RIM (RIM.TO), along with low-cost Chinese producer ZTE (000063.SZ), emerged as the biggest winners on the booming cellphone market in final quarter of 2010.

* Sara Lee Corp (SLE.N) plans to split up rather than sell itself, a source familiar with the situation said on Thursday after the company failed to win lucrative enough bids from potential buyers.

* In the wake of a credit rating downgrade for Japan by Standard & Poor's on Thursday, the International Monetary Fund said Japan and the United States needed to spell out credible deficit-cutting plans before the markets lose patience and dump their bonds.

* U.S. investors seeking higher returns plowed cash into riskier domestic equity and taxable fixed-income mutual funds in the week ended January 26, while municipal bond funds suffered an eleventh week of outflows, data from Lipper showed on Thursday.

* In Europe, the pan-European FTSEurofirst 300 .FTEU3 index of top shares was down 0.3 percent in early trade as heavyweight mining shares slipped.

(Reporting by Harpreet Bhal; Editing by Erica Billingham)

Even with growth quickening, however, progress reducing unemployment has been painfully slow, and the report on U.S. gross domestic product due on Friday will likely be little comfort for millions of unemployed Americans or the Federal Reserve officials on a jobs-creation vigil.

The economy grew at a solid 3.5 percent annual rate in the final three months of 2010, according to a Reuters survey, after expanding at a 2.6 percent pace in the third quarter.

The Commerce Department will release the advance GDP data at 8:30 a.m..

"It will likely show that the recovery has accelerated," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

"Unfortunately we still need to see much stronger growth to begin to really make a dent in the unemployment rate. Right now we are just barely creating enough jobs to stabilize the unemployment rate."

On Wednesday, Fed officials voiced concern that the pace of the recovery was still not strong enough to significantly lower unemployment and reiterated a commitment to a $600 billion stimulus effort through the purchase of government bonds.

The jobless rate has been stuck above 9 percent since May 2009. With the economy's growth potential between 2.5 percent and 2.7 percent, analysts say an expansion rate of at least 3 percent over several quarters is needed to cope with new entrants into the labor market and those who have given up the search for work.

The unemployment rate fell to 9.4 percent in December from 9.8 percent in November.

CONSUMERS STEPPING UP TO THE PLATE

Details of the GDP report are expected to show the economy moving in the right direction. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, is expected to have grown at a rate perhaps as high as 4 percent.

"The handoff from temporary factors to domestic demand is under way. This is what we need for the recovery to be self-sustaining," said Harm Bandholz, chief U.S. economist at UniCredit Research in New York.

Support to growth during the fourth quarter is also expected to have come from business spending on equipment and software, which should notch its seventh straight quarter of growth.

Although businesses have been hesitant to hire, they have used their vast cash reserves to buy new equipment and upgrade their technology. But the pace of investment in equipment and software probably slowed in the fourth quarter.

Government spending is expected to have made a modest contribution to growth.

The Nikkei average .N225 fell by nearly 1 percent, weighed down by financial stocks, as investors worried about higher borrowing costs after Standard & Poor's cut Japan's credit rating by a notch for the first time since 2002.

While the MSCI index of Asian stocks outside Japan .MIAPJ00000PUS was poised to eke out meager gains for the week, thanks to a mild recovery in risk-appetite, Asian stocks have underperformed the MSCI world index .MIWD00000PUS, which has risen by 2.5 percent since the beginning of the year.

A combination of worries of frothy valuations and a steady drip of positive data out of Europe and the United States have encouraged investors to take profits in some Asian markets, particularly in those that are seen as slow in tackling inflation.

Barclays strategists said Asian authorities are not countering price pressures with sufficient tightening and inflation risks would continue to have a bearing on these markets.

Malaysia held off from raising interest rates on Thursday while the Philippines said this week the U.S. Federal Reserve's dovish stance vindicated its low rates policy.

But some other central banks in the region are stepping on the policy brakes after heavy offshore selling.

India raised interest rates by a quarter point this week, its seventh such increase in less than a year, and Indonesia signaled an aggressive approach to tackling inflation.

Both markets have borne the brunt of the recent selloff.

India's stock index .BSESN is poised to register its worst monthly performance since October 2008 and 10-year Indonesian bond yields have risen by the most since early 2009.

Corporate earnings were robust, with Samsung (005930.KS), the world's top memory chipmaker, set to show improved results, sending its shares to a record.

LIMITED IMPACT

Japanese government bonds advanced, taking the ratings cut in stride, as investors focused more on the country's ample savings and largely domestically held debt.

March 10-year futures opened lower, but quickly reversed losses to be up 0.20 points at 139.98 as the downgrade had largely been seen as a matter of time. On Thursday evening, it fell to as low as 139.48 immediately after the downgrade.

Ten-year yields edged lower to 1.215 percent and credit default swaps widened slightly to around 83 bps, but well below peaks of near 100 bps hit in 2010.