Stocks drop more than 1 percent on credit concerns

NEW YORK (Reuters) - U.S. stocks plunged for a second day on Friday, in the worst week for the S&P 500 in nearly five years, as tightening credit conditions led to concerns that takeovers would slow.

Losses accelerated in the final minutes of trading, taking the Dow industrials down more than 200 points, a day after an equities sell-off that wiped out more than $300 billion in the value off the S&P 500.

"We've had this massive change in investor expectations in terms of new deal flow," said Fred Dickson, market strategist, director of retail research, D.A. Davidson & Co. Lake Oswego, Oregon. "The lifeguards have shouted, and investors are now starting to heed their warnings and head back to shore."

Investors fear increasing deterioration in credit markets would hurt chances for more corporate buyouts and dry up funding, and that losses in the subprime mortgage market may spill over into the broader economy.

A nearly 3 percent rise in oil prices to their second-highest settlement on record added to worries about the economy. Energy company shares, however, led decliners on the S&P 500. Exxon Mobil Corp. (XOM.N), which reported worse-than-expected results this week, dropped 3 percent.

The Dow Jones industrial average .DJI fell 208.10 points, or 1.54 percent, to end at 13,265.47. The Standard & Poor's 500 Index .SPX was down 23.71 points, or 1.60 percent, at 1,458.95. The Nasdaq Composite Index .IXIC was down 37.10 points, or 1.43 percent, at 2,562.24.

For the week, the Dow fell 4.2 percent, the S&P dropped 4.9 percent and the Nasdaq declined 4.7 percent.

The S&P suffered its worst one-week percentage drop since September 2002, while the Dow fell 585 points on the week, the biggest weekly point drop since July 2002.

Selling in financial shares also weighed on the market, with shares of Citigroup Inc. (C.N) among the biggest decliners on the S&P 500. Citigroup was down 1.8 percent at $46.97.

The mood on energy shares soured beginning Thursday when Exxon posted a quarterly profit that missed estimates. Shares of Exxon were down $2.64 at $85.59.

Chevron Corp. (CVX.N) fell 2.6 percent to $85.20 despite reporting a rise in quarterly profit. Analysts said that Chevron and other energy companies have been struggling to boost production. Exxon and BP Plc (BP.L)(BP.N) both posted declines in second-quarter profits, due in part to falling production.

Drug maker stocks also were among the big losers on the day, with shares of Merck & Co. (MRK.N) down 3.6 percent at

$50.12.

The Chicago Board Options Exchange's volatility index .VIX, the market's main gauge for measuring investor fear, closed at its highest level in more than four years.

Wall Street could be in for a rocky session come Monday if there are further signs that deal-making is slowing. Since the start of the year, Mondays have become known as "merger Mondays."

Stocks on Friday were higher briefly in morning trading.

Before the market's open, the Commerce Department reported that U.S. economic growth rebounded during the second quarter to its strongest pace since the beginning of last year on a surge in business investment, more government spending and a better trade performance. For details, see ID:nN27292437.

Also, comments by Treasury Secretary Henry Paulson lent some support. Speaking on CNBC television, Paulson said the economy was moving to a sustainable pace of growth and the risks in the subprime mortgages market were largely contained.

Trading was heavy on the New York Stock Exchange, with about 2.23 billion shares changing hands, above last year's estimated daily average of 1.84 billion, while on Nasdaq, about 2.7 billion shares traded, above last year's daily average of 2.02 billion.

Declining stocks outnumbered advancing ones by a ratio of about 11 to 5 on the NYSE and by 7 to 3 on Nasdaq.

(Additional reporting by Ellis Mnyandu)