The drop of more than 2 percent in major stock market indexes was a fitting end to two volatile weeks on Wall Street and followed back-to-back late-day triple digit gains in the Dow. This time, the catalyst for a sharp skid was Bear Stearns Cos. Chief Financial Officer Sam Molinaro, who described turmoil in the credit market as the worst he'd seen in 22 years.

According to preliminary calculations, the Dow fell 281.42, or 2.09 percent, to 13,181.91.

Broader stock indicators also fell. The Standard & Poor's 500 index dropped 39.14, or 2.66 percent, to 1,433.06, and the Nasdaq composite index fell 64.73, or 2.51 percent, to 2,111.25.

Small-capitalization stocks were hit hard again Friday, partly because the global economy is growing faster than that of the United States. Investors often contend profits at larger companies are more likely to hold up amid a U.S. slowdown because much of their business is drawn from overseas. The Russell 2000 index of small-capitalization stocks fell 28.58, or 3.65 percent, to 755.41.

The session also saw a notable rise in the bond market, as investors fled to the relative safety of fixed-income investments. The yield on benchmark 10-year Treasury note fell to 4.70 percent from 4.77 percent late Thursday. Bond prices move opposite yields.

Stocks started the day with a decline after the government said jobs growth was not as strong as expected last month and a trade group reported that the nation's service sector grew at a slower pace than expected in July. Then, credit concerns, which have dogged investors for months and have roiled markets since last week, weighed on investor sentiment again; Standard & Poor's Ratings Services lowered its credit outlook on Bear Stearns Cos. to negative from stable because of the investment bank's exposure to the distressed mortgage and corporate buyout markets. The stock fell $7.28, or 6.3 percent, to $108.35.

"I think there is a tremendous amount of uncertainty with regard to the credit markets and how the situation will ultimately settle," said Mike Malone, trading analyst at Cowen & Co.

Investors remain worried that problems in subprime mortgages — those made to borrowers with poor credit histories — will force lenders to make credit less available. When people and companies can't borrow money as easily, the economy tends to slow down.

"There is not going to be one sort of clear signal that suggests everything is OK," Malone said, referring to the subprime worries. "I think it's going to take time and the equity markets are going to experience heightened volatility."

Investors could be in for more volatility in the coming week, which not only includes economic figures on productivity and consumer credit, but also brings a meeting of the Federal Reserve's Open Market Committee, which has left short-term interest rates unchanged for the past year. Investors will likely be looking to its statement following its meeting for any word on the mortgage and credit markets.

The unease over the mortgage market and tightening credit Friday again dragged down financial stocks, which have been hard hit in recent weeks. Lehman Brothers Holdings Inc. fell $4.67, or 7.7 percent, to $55.78; its previous 52-week low was $58.85. Merrill Lynch & Co. fell $2.50, or 3.5 percent, to $70.05. During the session the stock fell below its previous 52-week low of $69.14.

Investors also fled lenders. American Home Mortgage Investment Corp. confirmed late Thursday it has stopped taking mortgage applications and is laying off most of its 7,000 staffers. American Home dropped 75 cents, or 52 percent, to 70 cents.

Countrywide Financial Corp. fell $1.77, or 6.6 percent, to $25. The nation's biggest mortgage lender said Thursday it has adequate access to cash and isn't facing the liquidity crunch that is hitting dozens of other smaller players.

In economic news, which didn't provide much reason for investors to look past the mortgage and credit concerns, the Labor Department said nonfarm payrolls rose 92,000 last month, less than the 132,000 jobs created in June and below the average forecast of about 135,000. Also, unemployment ticked up to 4.6 percent — a six-month high — from 4.5 percent in June. Still, overall unemployment remains low, analysts noted.

Also, the Institute for Supply Management said its non-manufacturing index for July fell to 55.8 from 60.7 in June. Wall Street had expected a reading of 59, according to Thomson Financial/IFR.

Investors still uncertain about the effect of rising subprime mortgage defaults on the broader economy have regarded the stable job market and consumer spending as signs the economy might hold up despite a tighter lending climate. That's because people with steady paychecks are more likely to keep spending and pay back their debt. At the same time, some pullback in employment might ease some concerns about wage inflation.

"I think the ISM and the jobs numbers are going to accelerate the general consensus view that maybe the economy is slower than anticipated," said Subodh Kumar, global investment strategist at Subodh Kumar & Assoc.

"The market has become very much driven from data point to data point because of uncertainty of a number of issues," he said, citing unease over credit, oil prices, and a weak dollar.

In other corporate news, Procter & Gamble Co., one of the 30 components of the Dow industrials, reported a rise in quarterly profit that beat expectations and announced plans to repurchase stock. P&G fell 42 cents to $62.88.

Toyota, poised to overtake General Motors Corp. this year as the world's biggest automaker, said profit in the most recent quarter soared 32 percent amid strong overseas sales and a weaker yen. Toyota rose 31 cents to $118.90.

Crude oil futures settled down $1.38 at $75.42 per barrel on the New York Mercantile Exchange after the employment report suggested the economy could slow and demand for oil could fall. Crude closed at a record $78.21 a barrel on Tuesday, though ended the week 2 percent lower.

Declining issues outnumbered advancers by about 5 to 1 on the New York Stock Exchange, where volume came to 2.11 billion shares compared with 1.15 billion traded Thursday.

In Asian trading, Japan's Nikkei stock average fell 0.03 percent, Hong Kong's Hang Seng index rose 0.4 percent, and China's Shanghai Composite Index rose 3.5 percent.