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The euro zone's debt crisis and weakness in China have fueled investor concern that the global economy could tip back into recession, possibly dampening U.S. earnings growth at a time when the U.S. economy is still struggling to gain ground.

Overseas sales have helped U.S. companies beat earnings expectations in the last couple of years, with foreign sales totaling 30 percent on average for Standard & Poor's 500 companies.

"If the euro region is crumbling, that's going to have a tremendous negative impact" on companies like McDonald's, said Todd Schoenberger, managing director at LandColt Trading in Wilmington, Delaware.

"I'm not expecting a big earnings quarter," he said. "We've been getting the clues already."

The most recent company to trouble investors about the earnings outlook is Ingersoll Rand Plc, whose shares tumbled 12.1 percent to $28.09 on Friday after the industrial conglomerate cut its third-quarter and full-year earnings forecast to below market estimates.

Investor pessimism is already high.

The S&P 500 finished the quarter with its worst performance since 2008, and many strategists have slashed their forecasts for year-end.

The S&P 500 dropped 14.3 percent in the third quarter, losing about $1.7 trillion in market capitalization.

A disappointing third-quarter earnings period, which begins the second week of October, could only trigger more losses, analysts said. Stronger-than-expected earnings helped stocks claw back fro 12-year lows in 2009.

Next week, investors also will be bracing for data on the U.S. job market, among the weakest parts of the economy. The government's September employment report is due Friday, while U.S. manufacturing data from the Institute for Supply Management is due Monday. The ISM services-sector index is set for release on Wednesday.

CURRENCY CUSHION MAY BE THINNER

Companies reporting earnings have benefited for the last decade from weakness in the dollar, which helped overseas revenue figures.

With the euro down 7.4 percent this quarter, the biggest quarterly loss by percentage since mid-2010, companies could lose some of that currency cushion.

"I think you'll see a lot of companies blaming problems on Europe," said Justin Walters, co-founder of Bespoke Investment Group in Harrison, New York.

Walters said excluding companies that report no international sales, the average percentage of overseas revenue for the S&P 500 is 41 percent.

The euro-zone debt crisis has investors worried about a repeat of the 2008 financial crisis.

In China, which has been a major engine of growth for the global economy, data has shown some weakness. On Friday, figures showed the country's manufacturing shrank for the third month in a row and had the longest contractional streak since 2009.

Analysts have slowly been reducing earnings forecasts for the quarter.

Third-quarter earnings are expected to have risen 13.3 percent from a year ago, according to Thomson Reuters data. The forecast was for 17 percent growth on July 1.

"If there's a very drastic downturn in the European economic zone, that portion of U.S. earnings will be impacted," said Natalie Trunow, chief investment officer of equities at Calvert Investment Management in Bethesda, Maryland, which manages about $14.8 billion.

But she and other strategists are optimistic that the earnings period will not disappoint, and could even present a buying opportunity.

"U.S. multinationals don't necessarily derive all of their additional earnings (from Europe), and in China, data seems to be showing a slowdown but not in hard-landing territory," Trunow said.

Other strategists said the dramatic cost-cutting that U.S. companies started in the 2008 financial crisis will help to keep bottom-line earnings numbers relatively healthy.

"In our view, corporate America has learned to make money in this environment," said Hank Smith, chief investment officer at Haverford Trust Co. in Philadelphia.

(Reporting by Caroline Valetkevitch; Editing by Jan Paschal)

The euro and most commodity prices also fell as investors' search for safety drove up U.S. government bonds and the dollar.

Adding to a string of global data that has crushed growth-related assets in the past three months, China's manufacturing sector contracted for a third straight month in September while German retail sales slid at their sharpest pace in more than four years.

An unexpected rise in euro-zone inflation for September also moderated talk that the European Central Bank would cut interest rates. Still, the euro fell sharply to close its worst quarter against the U.S. dollar since mid 2010.

"The combination of sovereign debt crisis, a slowing economy and really what appears to be ineffective leadership in Europe has led to this decline, and we expect that to continue to play out in the fourth quarter," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

U.S. stocks fell, closing their worst quarter since the collapse of Lehman Brothers in late 2008 with sharp declines.

The MSCI All Country World Index slumped 18 percent for the quarter, with a drop of 2.3 percent on Friday. It lost roughly $5.29 trillion in market capitalization in the quarter, according to Thomson Reuters Datastream.

On Friday, the Dow Jones industrial average dropped 240.60 points, or 2.16 percent, to 10,913.38. The S&P 500 fell 28.98 points, or 2.50 percent, to 1,131.42. The Nasdaq Composite slid 65.36 points, or 2.63 percent, to 2,415.40.

U.S. crude oil prices fell 4.1 percent on Friday, down more than 17 percent in the quarter. Copper, a key industrial metal that is a proxy for growth expectations, was down 25.8 percent over the last three months.

"There is a lot of fear that GDP growth is going to slow down, or it's not going to be as fast as consensus estimates assume," said Adam Krejcik, an analyst at Roth Capital in Newport Beach, California. "Generally speaking, there is a lot of fear out there, just a crisis of confidence."

Mining stocks were among the worst performers, hit by the news of slowing growth in China, the world's second-largest economy and an engine of global growth.

EURO OFF, BONDS FLY AMID THE GLOOM

The euro slipped versus the U.S. dollar and posted its biggest monthly drop in nearly a year, weighed down by the lack of a visible solution to the euro zone's deepening debt troubles.

The single currency fell to a low of $1.3384 and was last at $1.3392, down 1.5 percent for the day. For the month of September, the euro lost 6.6 percent, its weakest performance since November 2010.

In contrast, a gauge of the U.S. dollar against major currencies rose 0.9 percent.

A boost to the euro after Germany's parliament approved new powers for the euro-zone bailout fund proved fleeting after the data on the slump in German retail sales in August.

Leaders in Germany's ruling coalition said they opposed moves to increase states' liabilities to the bailout fund, keeping alive concerns that Europe will not be able to do enough to prevent the crisis from spreading.

The deepening economic gloom has prompted investors to slash bets on risky assets for most of the quarter that ended Friday.

The retreat continued to push safe-haven U.S. Treasury debt prices higher on Friday, with longer-maturity bonds posting their best quarter since the final period of 2008.

U.S. Treasuries held steady at higher price levels after the New York Fed announced the initial schedule for its $400 billion bond program, known as Operation Twist.

The benchmark 10-year note was last up 25/32 in price to yield 1.9172 percent, down from 2.00 percent late on Thursday.

The 30-year bond jumped 3-3/32 in price to yield 2.917 percent, down from 3.06 percent.

(Additional reporting by Karen Brettell, Wanfeng Zhou and Edward Krudy; Editing by Leslie Adler, Jan Paschal and Dan Grebler)

A steep slide on Friday closed out a fifth month of losses as weak economic data from China sparked fears of a global economic slowdown while investment bank Morgan Stanley plummeted on concerns about its exposure to European banks.

The S&P 500 index has lost more than 14 percent this quarter and over 7 percent in September alone. As of Thursday, Wall Street's deep downturn in the third quarter wiped out $2.2 trillion of the Wiltshire 5000 index -- the broadest measure of U.S. stocks.

"Why is the market so soft and so weak? Because '08 is still fresh in people's memories," said Joseph Mazzella, a senior trader at Knight Capital in Jersey City, New Jersey.

Stocks have been battered by the threat of a slowdown and fears that a Greek debt default could spark a credit shock similar to that caused by Lehman Brothers in September 2008, sending markets into a tailspin.

Fears of a hard landing in the world's second largest economy joined the potent mix troubling investors after China's manufacturing sector shrank for the third month in a row.

HSBC's China flash purchasing managers index showed the longest contractional streak since 2009 in a worrying sign for the world economy, which has looked to China as a rare source of expansion.

"The economic engine that has been driving growth has been China and if that comes undone, it gets scary again," said Mazzella.

Investors will be eyeing China's official PMI, due out on Saturday, which may have edged up again in September. Any disappointment there will be a blow for markets.

Financial shares stumbled with Morgan Stanley, which fell 10.5 percent to $13.51 as investors appeared to react to fear signals in credit markets.

The cost of insuring Morgan Stanley's five-year bonds spiked in recent days to almost three times what it was on June 30. It shares have erased all their gains of the last three year.

The Dow Jones industrial average dropped 240.60 points, or 2.16 percent, to 10,913.38. The Standard & Poor's 500 Index fell 28.98 points, or 2.50 percent, to 1,131.42. The Nasdaq Composite Index lost 65.36 points, or 2.63 percent, to 2,415.40.

Wall Street's "fear gauge," the CBOE volatility index, or VIX, rose more than 10 percent to 42.96, its highest close since mid-August and indicating investors expect more volatility ahead.

"There is a lot of fear that GDP growth is going to slow down, or it's not going to be as fast as consensus estimates assume," said Adam Krejcik, an analyst at Roth Capital in Newport Beach, California. "Generally speaking there is a lot of fear out there, just a crisis of confidence."

Through Thursday, the MSCI All Country World Index had lost about $4.7 trillion in market capitalization. The U.S. benchmark S&P 500 has lost about $1.7 trillion in market cap during the quarter.

Euro zone annual consumer prices unexpectedly rose in September 3.0 percent and followed surprisingly higher inflation in Germany.

In what may be a precursor to the quarterly earnings season, Ingersoll Rand Plc tumbled 12.1 percent to $28.09 after the industrial conglomerate cut its third-quarter and full-year earnings forecast to below market estimates. The Morgan Stanley cyclical index dropped 3.6 percent.

Markets showed little reaction two U.S. economic reports that were stronger than analysts expected.

Business activity in the U.S. Midwest grew more than expected in September, buoyed by new orders and a jump in employment.

The Institute for Supply Management-Chicago business barometer surprisingly rose in September more than economists had forecast.

U.S. consumer sentiment improved in late September but worries persisted about jobs and finances, which could curb household spending in the coming months, the Thomson Reuters/University of Michigan final September reading of the overall index on consumer sentiment showed.

About four stocks fell for every one that rose on the New York Stock Exchange. On the Nasdaq, about 7 stocks fell for every two that rose.

About 8.58 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, above this year's daily average of 7.96 billion.

(Additional reporting by Himank Sharma; Editing by Kenneth Barry)

Kodak, which delivered the first consumer camera in 1888, denied it had a bankruptcy plan, saying it was committed to meeting its obligations and is still looking for ways to "monetize" its patent portfolio.

Once synonymous with photography, Kodak has struggled with the move to digital cameras and failed to turn a profit since 2007. It has been exploring a sale of its digital imaging patents, worth an estimated $2 billion, and hired investment bank Lazard in July to explore options.

Rochester, New York-based Kodak said it has "no intention of filing for bankruptcy," after its shares plunged as much as 68 percent to 54 cents before recovering slightly to close down 53.8 percent at 78 cents on the New York Stock Exchange.

The company's market value plummeted to roughly $210 million on Friday, down from a lofty height of $31 billion in February 1997, as shown by regulatory filings. The cost to insure Kodak's debt with credit default swaps (CDS) surged on Friday as investors priced in greater bankruptcy risk.

Kodak had already scared markets on Monday when it tapped a credit line but refused to divulge its cash position. The stock dived to a 38-year low that day.

Then investors took fright again Friday after Bloomberg reported that potential buyers for its patent portfolio were cautious about going ahead with a bid as they could risk having Kodak creditors sue them after a bankruptcy filing.

Mark Kaufman, an analyst at Rafferty Capital Markets, said that Kodak urgently needed to seal a patent deal.

"I don't believe bankruptcy is inevitable. This is a pretty valuable portfolio, they should get a good price," he said. "They need to get this (sale) out of the way. They need to sell this portfolio, raise some type of cash."

The company said in July that it hired Lazard to advise on strategic options for its patents -- increasingly seen as lucrative assets. Bankrupt Canadian company Nortel fetched $4.5 billion in a patent sale in June, also run by Lazard. Google Inc agreed in August to buy Motorola Mobility for $12.5 billion primarily for its patent portfolio.

One expert -- Robert Miller, a professor at Villanova University School of Law -- said filing for bankruptcy may actually end up boosting the value of a patent sale.

Even if the company holds a robust, public auction outside of bankruptcy, the headache of litigation still looms if Kodak goes bankrupt later, said Miller.

Selling the assets as part of a bankruptcy court-supervised auction would solve that concern, Miller said.

Kodak confirmed that it has hired Jones Day but did not explain why, beyond saying it was "not unusual for a company in transformation to explore all options."

Investors for the company have been up in arms about everything from its share price decline to its management.

One shareholder had asked the company's board on Thursday to start a sales process while others sharply criticized Chief Executive Antonio Perez.

The company's board is not considering replacing Perez at this time, according to a story in the Wall Street Journal, which cited two people familiar with the matter.

Kodak CDS costs rose to 70 percent Friday from 61 percent Thursday, data provider Markit said. That means it would cost $7.0 million in upfront payments, plus $500,000 a year to insure $10 million debt if Kodak debt for five years.

"This is pretty expensive insurance at this point and the reason it's so expensive is that people believe there's a high likelihood of default," said Markit analyst Otis Casey.

(Additional reporting by Paul Thomasch, Nicholas Brown, Dena Aubin, Caroline Humer, Nadia Damouni, Phil Wahba and Jonathan Stempel; editing by Gerald E. McCormick, Matthew Lewis, Gary Hill)

The SEC staff said concerns include failures to follow ratings methodologies, failures in making timely and accurate disclosures and failures to manage conflicts of interest.

The SEC's annual report was required by last year's Dodd-Frank financial oversight law.

The staff report did not single out by name any credit-rating agency for questionable actions.

It also said the SEC has not determined that any of the report's findings constituted a "material regulatory deficiency" but said it might do so in the future.

"We expect the credit rating agencies to address the concerns we have raised in a timely and effective way, and we will be monitoring their progress as part of our ongoing annual examinations," said Norm Champ, deputy director of the SEC's Office of Compliance Inspections and Examinations.

The SEC's report covers 10 credit-rating firms including Moody's Corp, McGraw-Hill Cos Inc's Standard & Poor's and Fimalac SA's Fitch Ratings.

Congress first empowered the SEC to closely regulate the firms in 2006, and Dodd-Frank gave the agency even greater powers over the industry.

Credit raters have been widely criticized for fueling the financial crisis by giving inflated ratings to toxic subprime mortgage securities.

On Monday McGraw-Hill disclosed that the agency might charge its Standard & Poor's unit with breaking securities laws.

SEC Enforcement Director Robert Khuzami told Reuters this week that the agency faces hurdles proving wrongdoing at credit-rating agencies, pointing to the complexity of the cases and the industry's strong legal defenses.

(Reporting by Andrea Shalal-Esa, Aruna Viswanatha, Karey Wutkowski, editing by Gerald E. McCormick)

The Commerce Department said on Friday spending rose 0.2 percent, in line with economists' expectations, after increasing 0.7 percent in July. When adjusted for inflation, however, spending was unchanged after rising 0.4 percent in July.

Consumer spending accounts for about 70 percent of U.S. economic activity.

Income slipped 0.1 percent, the first decline since October 2009, with private wages and salaries dropping $12.2 billion after increasing $23.8 billion in July.

Economists had expected income to edge up 0.1 percent.

"What you're basically getting is a scene where consumers are losing momentum, they're losing momentum on income and as a result of that they're slowing down on spending," said Steven Ricchiuto, U.S. chief economist at Mizuho Securities in New York.

Employment growth ground to a halt in August, and the jobless rate remains at a lofty 9.1 percent.

U.S. stock index futures held losses after the data, while bonds slightly extended gains.

Consumer spending growth slowed sharply to a 0.7 percent annual pace in the second quarter after advancing 2.1 percent in the first three months of the year.

Overall economic growth rose at a 1.3 percent rate in the second quarter after expanding only 0.4 percent in the January-March period.

Last month, real spending on goods fell 0.2 percent, while services ticked up 0.1 percent.

Disposable income was unchanged for the first time since September, but when adjusted for inflation fell 0.3 percent, the largest drop since October 2009.

With real disposable income weak, savings fell to an annual rate of $519.3 billion, the smallest since December 2009, from $550.5 billion in July. The savings rate dropped to 4.5 percent, also the lowest since December 2009.

The report showed a moderation in inflation pressures on a monthly basis. The personal consumption expenditures price (PCE) index rose 0.2 percent after increasing 0.4 percent in July.

Compared to August last year, the index was up 2.9 percent, the largest increase since October 2008, after advancing 2.8 percent in July.

The core PCE index -- excluding food and energy - rose 0.1 percent after gaining 0.2 percent the prior month.

The core index, which is closely watched by Federal Reserve officials, increased 1.6 percent in the 12 months through August after rising by the same margin in July.

The Federal Reserve would like to see it close to 2 percent.

(Reporting by Lucia Mutikani; Additional reporting by Emily Flitter in New York; Editing by Andrea Ricci)

* Swiss drugs industry supplier Lonza (LONN.VX) has extended its offer for U.S. group Arch Chemicals (ARJ.N) as it seeks to close a $1.2 billion deal that would make it the world's largest player in the microbial control market.

* At 1230 GMT, the Institute for Supply Management-New York releases September index of regional business activity. In August, the index read 537.6.

* The Institute of Supply Management Chicago releases at 1345 GMT September index of manufacturing activity. Economists predict a reading of 55.5 compared with 56.5 in August.

* McGraw-Hill Companies Inc (MHP.N) is in advanced talks to merge its S&P Indices business with CME Group Inc's (CME.O) Dow Jones Indexes, a source familiar with the situation said on Thursday.

* Thomson Reuters/University of Michigan Surveys of Consumers release final September consumer sentiment index at 1355 GMT. Economists expect a reading of 57.8, a repeat of the preliminary September figure.

* The rock-bottom price of the new Kindle Fire tablet computer is raising questions about Amazon.com Inc's (AMZN.O) ability to keep up with demand and the device's effect on the company's already razor-thin profit margins.

* The Commerce Department releases at 1230 GMT August personal income and consumption data. Economists expect a 0.1 percent rise in income and a 0.2 percent increase in spending. In July, income rose 0.3 percent and spending was up 0.8 percent.

* Economic Cycle Research Institute releases at 1430 GMT its weekly index of economic activity for September 23. In the prior week, the index read 122.2.

* China's manufacturing sector contracted for a third consecutive month in September, suggesting that the world's second-largest economy is not immune to global headwinds, while factory inflation quickened.

* Oil and gas company Apache Corp (APA.N) said its subsidiary will proceed with the development of the Balnaves oil field in offshore Western Australia, with gross peak production of about 30,000 barrels per day.

* The U.S. Justice Department is investigating accounting irregularities at Chinese companies listed on U.S. stock exchanges, said an official with the U.S. Securities and Exchange Commission, suggesting criminal charges may be brought in addition to civil proceedings.

* Japan's Toshiba Corp (6502.T), the world's No.3 chipmaker, said on Friday that it will sell its Malaysia chip assembly unit to Amkor Technology Inc (AMKR.O) as part of its push to consolidate chip operations.

* European shares .FTEU3 fell 1.1 percent on Friday, on track to record their worst quarterly performance since late 2008, as markets grapple with slowing global growth and a long-running euro zone sovereign debt crisis.

* The Dow Jones industrial average .DJI gained 143.08 points, or 1.30 percent, to 11,153.98 on Thursday. The Standard & Poor's 500 Index .SPX gained 9.34 points, or 0.81 percent, to 1,160.40. But the Nasdaq Composite Index .IXIC dropped 10.82 points, or 0.43 percent, to 2,480.76.

(Reporting by Atul Prakash; Editing by Mike Nesbit)