Dow falls 394.64 points on jobless rate, record oil

NEW YORK (Reuters) - Stocks plunged on Friday, marking the Dow's worst day in 15 months, after the government said the May unemployment rate jumped the most in 22 years and oil prices shot to another record, renewing fears that the U.S. economy faces 1970s-style stagflation.

The one-two punch of those remarkable catalysts sent investors fleeing from stocks into the safety of government bonds on the worry that corporate profits will remain under siege for longer than currently forecast. The benchmark S&P 500 fell 2.8 percent for the week to close near a two-month low.

U.S. crude's dramatic $11 jump -- its biggest-ever one-day spike in dollar terms -- fueled concerns about inflation and consumers' spending power, a key driver of economic growth.

Oil thundered past the old high hit in late May on the dollar's weakness and tensions in the Middle East.

General Electric Co and other economic bellwethers slid after a Labor Department report showed the unemployment rate rose in May to 5.5 percent -- its highest level since October 2004 -- from April's jobless rate of 5.0 percent. The report also showed the economy shed jobs for a fifth straight month.

Analysts said a backdrop of slowing growth and rising price pressures, known as stagflation, could tie the hands of the Federal Reserve as it seeks to boost a sputtering economy.

"This is the worst economic environment," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams in New York. "I don't see how this is not stagflation."

The Dow Jones industrial average was a sea of red, tumbling 394.64 points, or 3.13 percent, to end at 12,209.81, its biggest drop since February 2007. The blue-chip Dow average was off 3.4 percent for the week. All 30 Dow components finished Friday's session lower.

Only 18 stocks in the Standard & Poor's 500 Index ended the day in the black. The S&P 500 slid 43.37 points, or 3.09 percent, to finish the day at 1,360.68.

The Nasdaq Composite Index lost 75.38 points, or 2.96 percent, to close at 2,474.56, down 1.9 percent for the week.

Both the S&P 500 and the Nasdaq dropped the most in four months on Friday.

Shares of GE, a diversified manufacturer, ranked among the top drags on the S&P 500, down 3.4 percent at $30.02 on the New York Stock Exchange. Exxon Mobil was the heaviest weight on the S&P, down 2.8 percent at $86.79 on the NYSE.

Plane maker Boeing's shares slid 5.4 percent to $73.16 on the NYSE and exerted the biggest drag on the Dow.

Financial services companies' shares were another big casualty, with insurer American International Group Inc down 6.8 percent to $33.93.

Shares of JPMorgan Chase & Co, the No. 3 U.S. bank, shed 4.8 percent to $40.09. The S&P financial index tumbled 5 percent.

Shares of consumer-oriented companies took a beating, with the S&P retail index down 4.3 percent. Shares of Wal-Mart Stores Inc slipped 2.4 percent to $58.37, giving up some of the gains notched on Thursday on a stronger-than-expected May sales report.

The surge in crude prices also hurt airline stocks, with UAL Corp down 14.5 percent at $8.64 on the Nasdaq. The airline index lost almost 7 percent.

The Dow Jones home builders index fell 6.8 percent to 294.49, its lowest since March.

Trading volume was modest on the New York Stock Exchange, with about 1.48 billion shares changing hands, below last year's estimated daily average of roughly 1.90 billion, while on Nasdaq, about 2.21 billion shares traded, above last year's daily average of 2.17 billion.

Declining stocks trounced advancing ones by nearly 5 to 1 on the NYSE and 4 to 1 on the Nasdaq.

(Editing by Jan Paschal)