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The deepening gloom raised the prospect for the S&P, which suffered its worst week since August 2010, to break below the year's low of 1,250 next week.

The Nasdaq wiped out its yearly gains on Friday and also posted its biggest weekly decline since August 2010, as the latest deterioration in sentiment came on fear of flagging Chinese growth and fresh worries about Greece's debt crisis.

The Dow closed below 12,000 for the first time since mid-March.

Reflecting the bearish sentiment, options traders eyed calls on the CBOE Volatility Index .VIX, Wall Street's so-called fear gauge, which moves inversely to the S&P 500's performance. The VIX rose 6.1 percent to end at 18.86.

"We broke below the April low, which was about 1,295 (on the S&P 500) pretty much at the open today. We are probably going to test the March lows if data next week remain weak," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

"But investors are very susceptible to any kind of news and since we are very oversold here, we could see the market instantly bounce back if we get anything remotely good."

The Dow Jones industrial average .DJI fell 172.45 points, or 1.42 percent, to 11,951.91. The Standard & Poor's 500 Index .SPX slid 18.02 points, or 1.40 percent, to 1,270.98. The Nasdaq Composite Index .IXIC tumbled 41.14 points, or 1.53 percent, to 2,643.73 at the close.

For the week, the Dow was down 1.6 percent, the S&P 500 was off 2.2 percent and the Nasdaq was down 3.3 percent.

The S&P 500 has fallen about 6.6 percent from its intraday peak early last month. Many see the benchmark index sliding back down to around 1,250, its March low, where valuations could bring investors back into equities.

At 1,250, the S&P 500 would be roughly 1.7 percent below current levels and approaching a 10 percent decline commonly referred to as a correction.

FINANCIALS DECLINE

Bank stocks, already under pressure, finished lower, with the KBW Banks Index .BKX dropping 0.4 percent after sliding more than 2 percent earlier in the day. The Federal Reserve said it will subject more banks to annual stress tests to determine whether they have enough capital and can raise their dividends.

Some of the biggest decliners were regional bank stocks that are now going to face annual tests.

Northern Trust Corp (NTRS.O) fell 1.2 percent to $46.77 and M&T Bank Corp (MTB.N) lost 1.2 percent to $84.41.

But large banks, including JPMorgan Chase (JPM.N) and Bank of America (BAC.N), rose in a late rebound, on a news report that the extra capital charge on big banks will likely be 2 percent to 2.5 percent, compared with the widely predicted 3 percent, traders said.

Bank of America shares rose 1.4 percent to $10.80 and JPMorgan added 0.2 percent to $41.05.

The S&P energy index .GSPE declined 1.9 percent while the S&P index of industrial stocks .GSPI lost 1.6 percent.

China's sales to the United States and the European Union slumped to their weakest since late 2009, excluding Lunar New Year holidays, underlining the view that the world economy is stumbling.

In another negative for stocks, the euro tumbled more than 1 percent against the U.S. dollar as fears about Greece's debt returned to the forefront and investors curbed expectations about the European Central Bank's interest-rate hikes. Investors have been recently trading the correlation between stocks and the dollar.

The PHLX semiconductor index .SOX slid 1.7 percent, sinking to its lowest since early December. The SOX fell below its 200-day moving average for the first time since last October.

About 7.47 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, compared with the daily average of 7.59 billion.

Declining stocks beat advancing ones by 2,419 to 587 on the NYSE while on the Nasdaq, decliners beat advancers by 1,987 to 593.

(Reporting by Angela Moon; Editing by Jan Paschal)

The Fed said it will buy $50 billion of Treasuries, the final series of government bond purchases that marks the last phase of the $600 billion program it launched in November 2010 to prevent another recession. For more, see

As a result, once the purchases are concluded on June 30, the financial sector will receive only a fraction of the roughly $100 billion a month in easy money it has been getting from the Fed.

The conclusion of the Fed's bond-buying program, known as "Quantitative Easing 2," does not mean the stimulus will come to a complete stop. The Fed will reinvest maturing securities, mainly mortgage-related debt, which analysts predict will run at $12 billion to $16 billion per month.

While still a lot of money, it is a huge step down from stimulus levels at the height of the buying campaign, dubbed by markets as QE2 because it was the second round of Fed asset-buying in the wake of the 2008 financial crisis.

A key aim of QE2 was to hold down long-term interest rates to stimulate investment in capital equipment and risky assets. It came almost eight months after the Fed's first round of bond purchases, primarily in mortgage-related securities.

The initial bout of quantitative easing, worth $1.73 trillion, began in December 2008 and ended in March 2010. It was created to stabilize the housing sector, which was the epicenter of the financial turmoil and has yet to show signs of recovery.

The Treasury bond component of the first round of purchases totaled $300 billion, from March to October 2009.

The Fed's buying assets has been controversial from the start. Critics say it is tantamount to printing money, and it has been credited with fueling a stock market rally but blamed for a surge in oil and food prices.

The end of QE2 has been well-flagged. The Fed said at the outset it would run until the end of June 2011.

Still, investors expect stocks, bonds, gold and the euro to fall after it ends, according to a Reuters poll of 64 analysts and fund managers last month.

(Reporting by Burton Frierson, Richard Leong and Chris Reese, Editing by Chizu Nomiyama)

The fraud ran more than seven years until August 2009 when TBW collapsed after the U.S. housing market imploded, taking Colonial BancGroup Inc's Colonial Bank with it and putting hundreds of people at the firm out of work.

The Obama administration elicited guilty pleas from six senior executives. TBW's former chairman, Lee Farkas, was convicted in April on 14 counts of bank, securities and wire fraud as well as conspiracy.

It is one of the few cases in which prosecutors have been able to penetrate the executive suites of a major firm in the wake of the 2008 global financial crisis. Most prosecutions have involved lower-level employees or much smaller firms.

U.S. District Judge Leonie Brinkema sentenced TBW's former president Raymond Bowman to 30 months in prison after he pleaded guilty to two counts -- conspiracy to commit bank, securities and wire fraud and making false statements.

Prosecutors asked that he be imprisoned for five years, half the possible sentence because he cooperated with authorities. They said Bowman helped TBW steal hundreds of millions of dollars, and that he knew that the scheme at the firm was unethical at the very least and likely illegal.

Brinkema sentenced Desiree Brown, the company's former treasurer, to six years in prison after she pleaded guilty to conspiracy to commit wire, securities and bank fraud.

Prosecutors wanted eight years, a higher sentence because she administered the day-to-day activities of the fraud on behalf of Farkas and TBW, according to court filings.

Brown had no formal financial training and Farkas had picked her for the position "because he could control her," the government's sentencing memorandum filed with the court said. TBW did some $20 billion in mortgage sales annually.

Farkas is due to be sentenced on June 27.

One of the federal prosecutors said the TBW investigation was ongoing.

The cases are: USA v. Bowman, No. 11-cr-118 and USA v. Brown, No. 11-cr-84 in U.S. District Court for the Eastern District of Virginia.

(Editing by Robert MacMillan)

The Labor Department said import prices climbed 0.2 percent last month, confounding forecasts for a 0.7 percent decline and following April's revised 2.1 percent jump. In the year to May, import prices surged 12.5 percent, the largest gain since September 2008.

"This is simply reflecting the increase in import petroleum prices," said Anthony Karydakis, senior U.S. economist at Commerzbank AG. "Excluding petroleum, import prices have been very subdued."

The trend of higher energy prices was already being reversed with petroleum import prices falling 0.4 percent in May, the first decline since September 2010.

Overall export prices rose 0.2 percent after a downwardly revised 0.9 percent gain. Analysts had been looking for a 0.3 percent gain.

The data hinted at ongoing price pressures from overseas, but also suggested the recent decline in oil and commodity prices will soon translate into some relief for businesses in the form of lower costs.

Officials at the U.S. Federal Reserve, most recently New York Federal Reserve president William Dudley on Friday, have argued that the rapid rise in energy prices seen earlier in the year would be transitory, and therefore should not prove inflationary over the medium term.

Until late last year, policymakers had been concerned about the prospect of deflation, a damaging downward spiral in prices and wages. But since the launch of the Fed's $600 billion bond-buying program, overall inflation has firmed significantly.

U.S. consumer prices rose 3.2 percent in the year to April. But outside food and energy, the CPI climbed just 1.3 percent, below the central bank's presumed target of 2 percent or a bit below.

Last month's easing in fuel costs is expected to have helped temper U.S. inflation. A government report due on Wednesday is expected to show consumer prices rose a slim 0.1 percent in May. Outside food and energy, prices are seen up a still-mild 0.2 percent.

The year-on-year gain in overall inflation is expected to tick up to 3.3 percent, with the core price increase rising to 1.4 percent.

(Additional reporting by Emily Stephenson and Richard Leong, Editing by Chizu Nomiyama)

* China's export growth slowed in May, raising questions over the outlook for global growth at a time when investors have been rattled by a barrage of reports showing the U.S. economy is slowing down.

* "It indicates there is some slowing in world demand for Chinese products and that feeds right into the fears that our economy is slowing," said Jack de Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire.

* Ally Financial, an auto and mortgage lender majority owned by the U.S. government, is delaying a $6 billion initial public offering due to bad market conditions, two sources told Reuters.

* In another negative for U.S. stocks, the euro fell as worries about the Greek debt crisis eclipsed any support from a likely euro zone interest rate rise next month. Traders have been trading the correlation between stocks and the dollar recently.

* S&P 500 futures dipped 4.6 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures fell 33 points, and Nasdaq 100 futures were off 1.75 points.

* U.S. shares ended higher on Thursday for the first time in over a week, though equities closed off session highs as the mood among investors remained fragile following a 6 percent drop in the S&P 500 from its highs in May.

* Overseas markets were lackluster. European shares on the FTSEurofirst 300 .FTEU3 dipped 0.3 percent in early trade and were on track for a sixth straight week of losses. Japan's Nikkei .NK225 ended up 0.5 percent.

* Crude oil futures fell, paring earlier gains after Brent rose to a five-week high of $120 a barrel as Saudi Arabia began offering more oil to Asian refiners, easing worries about supplies following an inconclusive OPEC meeting.

* U.S. drugmaker Pfizer Inc (PFE.N) won European regulatory clearance to acquire Danish medical services company Ferrosan's consumer healthcare business from Altor 2003 Fund Ltd.

(Editing by Jeffrey Benkoe)

The 9.0 magnitude earthquake that rocked northeastern Japan on March 11 forced Toyota and other Japanese automakers to cut output at home and abroad as they struggled to secure vital parts. The ensuing nuclear disaster and power shortages have compounded problems.

The massive disruption to production will likely mean Toyota will fall behind General Motors Co and possibly Volkswagen AG to rank third in global vehicle sales this year.

That possibility was downplayed by a Toyota official on Friday.

"We don't see it as necessary to be the largest automaker in the world," said Toyota's executive vice president, Satoshi Ozawa.

In addition to production problems, the carmaker has had to cope with a strengthening yen that cuts the value of overseas earnings and makes cars it builds in Japan for foreign markets more expensive to produce.

Toyota said on Friday it expects the dollar to average 82 yen in the current financial year to next March 31, against an averaged currency rate of a 86 yen-per-dollar last year.

The line in the sand to stay in profit, Toyota said, is a rate of 85 yen and sales of at least 6.6 million cars.

Toyota said on May 11 that the earthquake has contributed to a 52 percent fall in profit during the January-March quarter, but the company delayed unveiling the annual forecasts as it weighed the impact of the disaster on consumption and its supply chain.

"Structural weakness remains for Toyota, as it has a higher portion of domestic production than Honda and Nissan, which makes it vulnerable to the yen's strength," said Park Sang-Won an analyst at Eugene Investment & Securities in Seoul.

The world's biggest automaker cut its group-based global vehicle sales forecast for the 2011/12 business year to 7.24 million units from 7.3 million. The figures include sales at truck maker Hino Motors Ltd. and compact car maker Daihatsu Motor Co..

"We are studying production capabilities overseas. By increasing production toward the end of this year, we would like to regain market share that we have lost temporarily," Toyota's Ozawa said.

Toyota' latest earnings guidance compares with a consensus of a 434 billion yen operating profit based on the average of 23 forecasts by analysts polled by Thomson Reuters I/B/E/S. Operating profit in the year to March 2011 was 468.3 billion yen.

Toyota's shares have fallen 7.5 percent since the disaster, underperforming the benchmark Nikkei 225 average which lost 6.5 percent. Its shares on Friday rose 0.9 percent to close at 3,300 yen before the company released the profit forecast.

($1 = 80.305 Japanese Yen)

(Editing by Matt Driskill and Joseph Radford)