The Dow Jones industrial average fell 62.68, or 0.8 percent, to 8,268.64. The broader Standard & Poor's 500 index fell 10.19, or 1.1 percent, to 882.88, and the Nasdaq composite index fell 9.07, or 0.5 percent, to 1,680.14.
Investors moved more money out of stocks Friday, further chilling the market's spring rally.
Stocks extended the week's losses as traders accustomed to economic news being "less bad" found little incentive to buy.
According to preliminary calculations, the Dow Jones industrial average fell 62.68, or 0.8 percent, to 8,268.64. The broader Standard & Poor's 500 index fell 10.19, or 1.1 percent, to 882.88, and the Nasdaq composite index fell 9.07, or 0.5 percent, to 1,680.14.
The Labor Department said consumer prices in April were flat, as economists predicted. And manufacturing activity in the New York area and industrial production contracted less than economists expected. They also shrank significantly less than they did earlier in the year, fitting a trend seen in most data since early March: that the economy continues to slide, but at a slower pace.
A Reuters/University of Michigan index of consumer sentiment rose to an eight-month high in May. The improvement is a good sign as sentiment rebounds from a low in November. Increased confidence could translate to improved consumer spending.
But a drop in the price of oil hit energy companies. Financial stocks also fell as investors worried about the economic recovery being further out than hoped.
Wall Street's huge rally has hit a lull. The government's stress tests of banks are done, earnings reports are winding down and the first wave of April economic data have been released. Investors are growing concerned that perhaps they became too optimistic when they saw signs of the economy bottoming.
"We've gotten through the panic point, and what will get us to the next level is seeing the economy actually grow. It'll happen, but it's a matter of when," said Douglas Kreps, managing director at Fort Pitt Capital Group.
For the week, the Dow fell 3.6 percent, the S&P 500 index lost 3.4 percent and the Nasdaq slid 5 percent.
With the S&P 500 index up 30.5 percent from the 12-year lows of two months ago, many traders saw it as a safer bet to cash in some of the gains.
"This market is tired," said Joe Saluzzi, co-head of equity trading at Themis Trading LLC, noting that bank stocks were hurting the market. "The financials drag everything around. That's all you've got to watch."
About two stocks fell for every one that rose on the New York Stock Exchange, where volume came to 1.5 billion shares.
In mixed news for the market, the Treasury Department agreed to extend billions in bailout funds to six major life insurers. The move was positive because it means the insurers will get more capital, but negative because it implied that the insurers' problems posed a serious risk to the financial system.
Among the companies, the Hartford Financial Services Group Inc. said it is eligible for $3.4 billion from the Troubled Asset Relief Program, or TARP, while Lincoln National Corp. said it has been initially approved for a $2.5 billion injection.
Hartford fell 15 cents to $14.60, while Lincoln National fell 12 cents to $16.12.
Investors remained concerned about the auto industry. General Motors Corp., as expected, said it would notify 1,100 U.S. dealers Friday that their franchise agreements would not be renewed. GM said the closures -- which come a day after Chrysler LLC cut ties with a quarter of its dealers -- must be made as part of its government-ordered restructuring plan. GM fell 6 cents, or 5.2 percent, to $1.09.
Energy stocks weighed on the market as oil slid $2.28 to settle at $56.34 a barrel on the New York Mercantile Exchange. Schlumberger Ltd. fell $1.88, or 3.5 percent, to $52.05, while Devon Energy Corp. fell $3.51, or 5.7 percent, to $58.50.
FirstEnergy Corp. fell $3.87, or 9.6 percent, to $36.47 after the regional electric utility's energy supply and pricing auction in Ohio came in below analyst expectations. The stock traded as low as $35.26, a level not seen since December 2003.
Even a week ago, when the market hit its highest levels of the rally since March, investors would still buy when news wasn't as grim as feared. But this week mixed economic and corporate reports have put a break on the market's rally.
Dreyfus Chief Investment Officer Phil Maisano contends the break could be good for stocks. He said the market is fairly valued where it stands and is now factoring in a severe recession instead of a depression.
"We're clearly not going to have any form of a V-shaped recovery," Maisano said, referring to the pace of the rebound from the economy's tumble in the fall. "It will be a longer slog."
Even with the government's bank rescue and economic stimulus spending, Maisano expects the economy will still have a tough recovery.
"It was virtually a tourniquet. It stopped the bleeding but it doesn't have much effect on the healing at the moment," he said.
Next week, investors will get data on housing sales on Monday, on housing construction a day later and on regional manufacturing on Thursday. The reports could help drive the market but many analysts say more clear signs of an economic recovery, not just stabilizing, will be what is needed to propel Wall Street.
In other trading, the Russell 2000 index of smaller companies fell 4.87, or 1 percent, to 475.84.
Bond prices fell after the inflation data. The yield on the 10-year Treasury note rose to 3.14 percent from 3.09 percent late Thursday.
The dollar was mixed against other major currencies, while gold prices rose.
Overseas, Britain's FTSE 100 fell 0.3 percent, Germany's DAX index slipped less than 0.1 percent, and France's CAC-40 rose 0.4 percent. Japan's Nikkei stock average rose 1.9 percent.