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Anxiety over the debt crisis sent the S&P 500 lower for five straight days, resulting in the worst week and month for the benchmark index since August. The CBOE Volatility index, Wall Street's "fear index," rose more than 40 percent for the week, its biggest jump since early May.

With four days before the United States loses its ability to borrow, U.S. President Barack Obama on Friday told Republicans and Democrats to stop bickering and find a way "out of this mess.

"Right now, overall the market is being totally driven by the debt situation, whether it is in Europe or the U.S.," said Rick Bensignor, chief market strategist at Dahlman Rose in New York.

The deadline for raising the U.S. debt ceiling has investors on edge. Volatility, currently at its highest since the earthquake in Japan, can be expected to increase as time runs out.

"You've got individual stocks that can make significant moves but the market itself collectively is being pushed and pulled by every headline and how the wind is blowing out of Washington at any given moment."

The recent slide has also put stocks in a precarious position from a technical perspective as the S&P 500 index moves closer to its 200-day moving average, a level which could bring about additional selling if the index breaks below it.

The benchmark index successfully bounced off the level on Friday after the early morning decline.

"That is the line in the sand that really divides things going maybe bad -- to things really turning bad," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

"If we take that out next week -- man, I'm not neutral, I'm short."

Even if a deal is struck, the possibility remains the United States could lose its prized triple-A credit rating if the terms are not stringent enough to satisfy credit rating agencies.

"You are definitely going to get the downgrade by S&P," said Ken Polcari, managing director at ICAP Equities in New York.

"You are still waiting on what the ultimate deal is going to be and it's just not going to be what everybody expects, so you are going to see disappointment in the markets."

Investors can still find some solace in corporate earnings. According to Thomson Reuters data through Friday, of the 327 S&P 500 companies that have posted earnings, 73 percent have reported results higher than analysts' expectations.

Companies expected to report earnings next week include Kraft Foods Inc, Clorox Co, Pfizer Inc and Prudential Financial Inc.

"Individual stocks, especially after earnings are trading on their own accord and you are seeing moves of 5 to 10 percent sometimes after earnings come out," said Bensignor.

But added pressure is coming from economic data, with the latest revision of gross domestic product showing the U.S. economy stumbled badly in the first half of 2011 and came close to contracting in the January-March period.

The flagging data offers little hope next week's data -- including July's employment report -- can turn the tide of the pressure.

"I don't think the market is pricing in very much for the possibility we don't get a debt deal done, given how bad the economic data has been," said Michael Marrale, managing director and head of sales trading at RBC Capital Markets in New York.

"Put it this way, putting all the debt deal concerns aside, the market would probably be here anyway."

As investors asses the debt ceiling debate, slowing economic data and corporate earnings, they must remain prepared for any developments from the simmering debt crisis in the euro zone, which could further heighten investor angst.

"There are two things I keep my eye on -- one on Washington and one on Brussels, because between the two of them you never know which headline risk is going to hit you over the head next," said Mendelsohn.

(Reporting by Chuck Mikolajczak; Editing by Kenneth Barry)

Growth in gross domestic product -- a measure of all goods and services produced within U.S. borders - rose at a 1.3 percent annual rate, the Commerce Department said. First-quarter output was sharply revised down to a 0.4 percent pace from 1.9 percent.

Economists had expected the economy to expand at a 1.8 percent rate in the second quarter.

In addition, fourth-quarter growth was revised down to a 2.3 percent pace from 3.1 percent, indicating that the economy had already started slowing before the high gasoline prices and supply chain disruptions from Japan hit.

Economists had expected the economy would show signs of perking up by now with Japan supply constraints easing and gasoline prices off their high, but data has disappointed. This and the sharp downward revisions to the prior quarters suggest a more troubling and fundamental slowdown might be underway.

There is also heightened uncertainty over the outlook because of the impasse in talks to raise the nation's borrowing limit and avoid a damaging government debt default.

The Treasury says the government will soon run out of money to pay all its bills.

Economists have warned that a debt default could push the fragile economy over the edge.

"The implications of more rancorous foot dragging would be bad for an economy already in a precarious state," said Julia Coronado, chief North America economist at BNP Paribas in New York. "Uncertainty continues to tax an already fragile recovery."

Data released on Friday showed the 2007-2009 recession was much more severe than prior measures had found, with economic output declining a cumulative of 5.1 percent instead of 4.1 percent.

The annual revisions of U.S. GDP data from the Commerce Department showed the economy contracted at an annual average rate of 0.3 percent between 2007 and 2010. Output over that stretch had previously been estimated to have been flat.

The economy needs to grow at a rate of 2.5 percent or better on a sustained basis to chip away at the nation's 9.2 percent unemployment rate.

CONSUMER SPENDING BRAKE SHARPLY

The March earthquake in Japan severely disrupted U.S. auto production. The resulting shortage of motor vehicles weighed on retail sales as consumers were unable to find the models they wanted. That combined with high gasoline costs to curb spending.

Consumer spending, which accounts for about 70 percent of U.S. economic activity, decelerated sharply to a 0.1 percent rate -- the weakest since the recession ended two years ago.

Spending grew at a 2.1 percent pace in the first quarter.

Motor vehicle production subtracted 0.12 percentage point from gross domestic product growth in the second quarter, after adding 1.08 percentage points to first-quarter GDP growth.

The composition of growth in the April-June quarter was weak and could prompt economists to dial down their expectations for a quick and solid rebound in the third quarter.

A smaller trade deficit , as imports slowed, was one of the main contributors to the rise in second-quarter growth, with businesses spending and inventory investment also adding to output.

Government spending declined again in the second quarter as state and local authorities continued to pare their budgets, even though defense expenditures rebounded at 7.3 percent rate after contracting at a 12.6 percent rate in the first three months of the year.

Home building rose at a 3.8 percent pace, while investment in nonresidential structures increased at an 8.1 percent rate.

The easing of the auto parts disruptions and a drop in gasoline prices could be a tail wind to third-quarter growth, but economists are concerned that June data was rather weak.

"All the data we got for June thus far suggest that as we entered the third quarter, we did not gain any momentum setting up for a good third quarter," said Christopher Probyn, chief economist at State Street Global Advisors in Boston. "We are not starting the third quarter on a positive note," said Probyn, speaking before the GDP report was released.

The report also showed a moderation in inflation pressures, with the personal consumption expenditure price index rising at a 3.1 percent rate after rising 3.9 percent in the first quarter. Excluding food and energy, the core PCE index rose 2.1 percent, the fastest since the fourth quarter of 2009, after rising 1.6 percent in the first quarter. It overshot the Federal Reserve's preferred 2.0 percent level.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)

Futures for the S&P 500, for the Dow Jones and for the Nasdaq 100 were down 0.4 to 0.6 percent. Europe's FTSEurofirst 300 .FTEU3 fell 0.9 percent, while Japan's Nikkei average .N225 dropped 0.7 percent.

House of Representatives Speaker John Boehner's failure to round up enough support for his plan on Thursday exposed a rift in the Republican Party that is hampering efforts to reach a compromise to raise the U.S. debt ceiling before a Tuesday deadline.

House Republicans are due to meet at 10 a.m. (1400 GMT) on Friday to discuss a way forward.

The Commerce Department releases its advance (first) estimate of Q2 GDP at 1230 GMT. Economists in a Reuters survey forecast a 1.8 percent annualized pace of growth compared with a 1.9 percent rate in the final Q1 estimate.

The Labor Department issues at 1230 GMT the Employment Cost Index for the second quarter. Economists in a Reuters survey expect a rise of 0.5 percent versus a 0.6 percent rise in the first quarter.

Chevron ,CVX.N>, the second-largest U.S.-based oil and gas producer, will report second-quarter earnings that are expected to rise as the higher prices for oil and robust refining margins help offset slightly lower total output.

At 1230 GMT the Institute for Supply Management-New York releases July index of regional business activity. In the previous month, the index read 535.3.

The Institute of Supply Management Chicago releases at 1345 GMT July index of manufacturing activity. Economists forecast a reading of 60.0 in the month compared with 61.1 in June.

Thomson Reuters/University of Michigan Surveys of Consumers release at 1355 GMT July final consumer sentiment index. Economists in a Reuters survey expect a reading of 64.0 compared with 63.8 in the preliminary July report.

Merck & Co (MRK.N) is expected to report double-digit profit growth from higher sales of its array of pharmaceuticals and from its growing animal-health business.

Economic Cycle Research Institute (ECRI) releases at 1430 GMT its weekly index of economic activity for July 22. In the prior week the index read 127.5.

The euro zone debt crisis also continues to be a concern to markets. Rating agency Moody's put Spain on review for a possible downgrade on Friday, adding to concerns that a Greek rescue package has done little to halt the spread of Europe's debt crisis.

Amgen (AMGN.O), the world's largest biotechnology company, is expected to post lower profit and revenue as sales of its once top-selling anemia drug Aranesp continues to erode.

Shares in Telenav Inc (TNAV.O) fell 23.5 percent to $13.75 after the bell on Thursday after the company announced results.

On Thursday the Dow Jones industrial average .DJI ended down 62.44 points, or 0.51 percent, at 12,240.11. The Standard & Poor's 500 Index .SPX was down 4.22 points, or 0.32 percent, at 1,300.67. The Nasdaq Composite Index .IXIC finished up 1.46 points, or 0.05 percent, at 2,766.25.

(Reporting by Atul Prakash; Editing by Greg Mahlich)