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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)

In his strongest threat of intervention so far, Finance Minister Yoshihiko Noda said that the yen was rising "too much" and deviating from Japan's economic fundamentals.

"Our stance is clear. We will take decisive action against excessive exchange rate volatility," Noda told parliament.

"I'd like to carefully examine how long we can leave current (exchange-rate) moves unattended."

Noda said he hoped to take appropriate action, in cooperation with the Bank of Japan, to address the currency's rise that was hurting exporters and threatening Japan's recovery from damage wrought by the March 11 earthquake and tsunami.

Data released on Friday showed factory output rose further in June and manufacturers expected more gains in July and August that would bring production close to pre-quake levels, but economists said the yen's rise was clouding the outlook.

Policymakers' repeated verbal warnings have not prevented the dollar from sliding toward the record low of 76.25 yen hit in March on growing fears of a U.S. debt default or credit downgrade. It did not move much on Noda's latest warnings and hovered around 77.81.

A senior BOJ official said the central bank was focusing on how recent yen rises could affect a still fragile economic recovery, suggesting its readiness to ease monetary policy further as early as next week if yen climbs further.

SOLO ACTION

Markets rule out a repeat of the co-ordinated intervention that the Group of Seven carried out in the aftermath of the devastating earthquake in March, but some see solo action by Tokyo as a possibility.

Japanese policymakers, alarmed at the persistent nature of yen rises amid a broad-based dollar weakness, see solo action as an increasingly viable option, although markets are skeptical how long its effect would last.

"Noda's verbal warning has escalated slightly," said Michiyoshi Kato, senior vice president at forex sales at Mizuho Corporate Bank.

"It's not about dollar/yen levels alone. Authorities are probably also watching stock markets. If the U.S. debt problem triggers risk aversion and pushes the yen up suddenly, and if that increases worries about the impact on Japan's economy, Tokyo may act."

Policymakers hesitant of intervention have pointed to the resilience of the stock market as a sign the damage to the economy has been contained so far.

But the Nikkei average fell below the psychologically important 10,000 mark and business lobbies have started to complain more vocally about the government's inaction over the strong yen. Noda said he was aware of business concerns.

The BOJ feels the yen rise has yet to severely undermine business sentiment but is prepared to ease policy further if the standoff in U.S. debt talks roils global markets.

"Japan's economy is just recovering from a big shock after the quake. We need to watch out for the negative impact yen rises could have on the economy through exports, corporate revenues and a worsening of business sentiment," BOJ Executive Director Masayoshi Amamiya told parliament on Friday.

Japan's economy is expected to exit recession and grow moderately in July-September as companies make steady progress restoring supply chains hit by the quake.

(Additional reporting by Tetsushi Kajimoto, Stanley White, Rie Ishiguro and Kaori Kaneko; Editing by Tomasz Janowski)

The world's biggest coffee chain, which is coming off a years-long restructuring that involved closing poorly performing stores to rekindle growth, on Thursday reported better-than-expected fiscal third-quarter earnings.

Seattle-based Starbucks joined a raft of other premium-positioned companies -- including burrito chain Chipotle Mexican Grill (CMG.N) and Whole Foods Market Inc (WFM.O) -- in reporting out-sized same-store sales gains.

"The higher end is alive and well," said RBC Capital Markets analyst Larry Miller. Steakhouses and seafood restaurants also had strong results, he said.

"Reports of the consumer's demise were greatly exaggerated," said Miller, who added that McDonald's Corp (MCD.N) and other restaurant chains showed surprising health during the latest quarter.

Sales at Starbucks' U.S. cafes open at least 13 months, and which yield about four-fifths of its revenue, jumped 8 percent in its fiscal third-quarter ended July 3. Analysts expected a 5.3 percent increase.

Traffic in its home market climbed 6 percent, while average spending per visit rose 2 percent.

Chief Financial Officer Troy Alstead told Reuters menu price increases accounted for the bigger part of the rise in spending, but customers were also buying more food.

Starbucks targets more affluent consumers than the typical U.S. fast-food chain. Those customers have fared better than their lower-income counterparts as the U.S. economy sputters, and they have resumed spending on discretionary items like $4 lattes and organic foods.

CATERING TO THE WELL-HEELED

Starbucks shares, which have benefited from a massive restructuring that slashed costs and shut over 900 poorly performing cafes around the world, are up 60 percent from a year ago. On Thursday, it said it would be adding a net 800 stores globally in 2012.

That expansion comes despite high unemployment and the uncertain outcome of the U.S. debt ceiling debate weighing on the minds of consumers.

Upscale diners seem less wary. Chipotle, which offers naturally-raised meats and organic produce where possible, saw same-restaurant sales jump 10 percent in the most recent quarter. Whole Foods, top U.S. seller of organic food products, said its identical-store sales jumped 8.1 percent.

The gains at Starbucks, Chipotle and Whole Foods outpaced a 4.5 percent rise in U.S. same-restaurant sales at McDonald's, one of the restaurant industry's top performers and the leader among fast-food chains.

"Our results are a little bit in contrast to what I still believe to be an uncertain and fragile environment out there," Alstead said.

Wall Street also was upbeat about the coffee chain's new partnership with Green Mountain Coffee Roasters Inc (GMCR.O), whose popular Keurig machines control about 80 percent of the fast-growing North American single-serve brewing segment.

The companies plan to begin selling Starbucks coffee and Tazo tea for Keurig machines at wholesale clubs, drugstores and supermarkets in North America this autumn, in time for the important winter holiday season.

Alstead said the partnership would generate 3 cents to 5 cents in incremental earnings per share in fiscal 2012.

Green Mountain shares soared more than 16 percent on Thursday, one day after it said that deals with the likes of Starbucks and newly public Dunkin' Donuts (DNKN.O) would brew up bigger profits.

Seattle-based Starbucks boosted its earnings forecast for this fiscal year to $1.50-$1.51 per share from $1.46 to $1.48 a share, previously. Analysts, on average, were expecting a fiscal 2011 profit of $1.50 per share.

It also forecast a 15 percent to 20 percent increase in earnings per share in 2012 and a 10 percent increase in revenue. The forecast is based on mid-single digit comparable store sales growth and the opening of net 800 new stores.

The 2012 forecast includes the expected contribution from the Green Mountain deal.

Starbucks' third-quarter net income rose 34 percent to $279.1 million, or 36 cents per share, beating analysts' average estimate by 2 cents per share, according to Thomson Reuters I/B/E/S. Revenue rose 12 percent to $2.93 billion.

Shares were up 1.3 percent to $40.50 in after-hours trade. That gain came after the shares added 2.6 percent in regular Nasdaq trade on Thursday.

(Editing by Edwin Chan, Bernard Orr)