Stocks fell on Friday, capping off their worst month in over a year as a downgrade by Fitch of Spain's credit rating reignited worries about euro-zone debt issues.
The downgrade was the latest setback in a month in which the S&P 500 fell more than 8 percent on concerns the euro-zone debt woes would escalate into a global financial crisis.
"It definitely spooked the market, no doubt about it," said Terry Morris, senior equity manager for National Penn Investors Trust Company in Reading, Pennsylvania.
"Up until now it's been mostly Greece and the threat of Spain and Portugal and Ireland. With Fitch actually downgrading Spain, it seems as if it is no longer a hypothetical, the contagion is now real."
Fitch cut Spain's credit rating by one notch, saying the country's economic recovery will be more muted than the government forecast due to its austerity measures.
U.S.-listed shares of Spain's Banco Santander SA fell 2.7 percent to $10.15.
For the month, the Dow fell 7.9 percent, the S&P shed 8.2 percent and the Nasdaq lost 8.3 percent. The declines were the worst for the Dow and S&P since February 2009 while the Nasdaq suffered its worst monthly drop since November 2008.
The Dow Jones industrial average dropped 122.36 points, or 1.19 percent, to 10,136.63. The Standard & Poor's 500 Index fell 13.65 points, or 1.24 percent, to 1,089.41. The Nasdaq Composite Index declined 20.64 points, or 0.91 percent, to 2,257.04.
For the week, the Dow edged 0.6 percent lower, the S&P 500 gained 0.2 percent and the Nasdaq added 1.3 percent.
The downgrade follows similar cuts in ratings earlier this month of Greece and Portugal as those nations attempt to grapple with debt problems by implementing austerity measures.
"The concerns about austerity programs are real, they are still there," said Karl Mills, president of Jurika, Mills & Keifer Investment Partners in Oakland, California.
"Some days you don't think of it and you can breed a sense of complacency, and some days it matters a lot."
The downgrade pushed Wall St lower as stocks had fallen earlier after data showed consumer spending was unexpectedly flat last month and growth of U.S. Midwest business activity slowed more than expected.
Data from the Commerce Department showed April was the first month since September that consumer spending did not increase, but the largest gain in real disposable income in nearly a year gave hope that spending will resume in coming months.
A separate report showed business activity in the Midwest grew less than expected in May after scaling a five-year high in April. An employment gauge in the Institute for Supply Management-Chicago's survey slipped.
Investors also took advantage of the opportunity to book gains before a long holiday weekend and after a rally in the previous session. U.S. markets will be closed on Monday for the Memorial Day holiday.
Energy shares ranked among the biggest losers, a day after the S&P energy index racked up its largest gain in 14 months. The S&P energy index lost 2 percent. Halliburton tumbled 8 percent to $24.83 and Schlumberger fell 6.1 percent to $56.15.
The U.S.-listed shares of BP PLC shed 5.4 percent to $42.95 after the company's chief executive officer said some progress had been made in its bid to plug the leaking Gulf of Mexico oil well, though it could still take 48 hours to conclude whether it has been fully successful.
Apple Inc. was among the few bright spots, rising 1.5 percent at $257.16 after the iPad tablet computer debuted outside the United States and Bank of America-Merrill Lynch raised its price target on the stock by $25 to $325.
The Thomson Reuters/University of Michigan Surveys of Consumers showed consumer sentiment rose a bit in May from April but was roughly unchanged from levels since February, while the one-year inflation expectations index also climbed to its highest since October 2008.
Volume was light with about 9.06 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below last year's estimated daily average of 9.65 billion.
Declining stocks outnumbered advancing ones on the NYSE by 2071 to 968, while on the Nasdaq, decliners beat advancers by about 1819 to 844.
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