The inflation reading was the second in as many days that upended expectations that the Fed might consider lowering rates as the economy gives off signs of slowing. The sentiment overshadowed a stronger-than-expected increase in industrial production.

"The market is dealing with the softer economic data that we're seeing and trying to reconcile that with the somewhat stiff inflation data," said Marie Schofield, fixed income strategist and portfolio manager at Columbia Management Group.

MAJOR INDEXES DOWN FOR THE WEEK

The Dow Jones industrial average fell 49.27, or 0.41 percent, to 12,110.41.

Broader stock indicators also slipped. The Standard & Poor's 500 index fell 5.33, or 0.38 percent, to 1,386.95, and the Nasdaq composite index fell 6.04, or 0.25 percent, to 2,372.66.

Advancing issues outpaced decliners by about 3 to 2 on the New York Stock Exchange, where volume came to a heavy 2.07 billion shares as options contracts expired.

For the week, the Dow fell 1.35 percent, the S&P 500 index tumbled 1.13 percent and the Nasdaq fell 0.62 percent.

Bonds showed less movement than might be expected given inflation concerns and instead focused on a slide in stocks. The yield on the benchmark 10-year Treasury note rose to 4.55 percent from 4.54 percent late Thursday. The dollar was mixed against other major currencies, while gold prices rose.

Light, sweet crude oil settled down 44 cents at $57.11 per barrel on the New York Mercantile Exchange.

The Russell 2000 index of smaller companies fell 4.84, or 0.62 percent, to 778.77.

Overseas, Japan's Nikkei stock average closed down 0.69 percent, Hong Kong's Hang Seng index fell 0.08 percent and the often volatile Shanghai Composite Index fell 0.72 percent. Britain's FTSE 100 closed down 0.04 percent, Germany's DAX index slipped 0.09 percent, and France's CAC-40 fell 0.14 percent.

INFLATION CONCERNS LINGER

Inflation concerns remained entrenched on Wall Street Friday. The Labor Department's report that its Consumer Price Index rose by 0.4 percent in February renewed some of the concerns that dogged stocks on Thursday. Wall Street had expected an increase of 0.3 percent. The rise was double that of January and the largest rise since a similar increase in December. Rising costs for gasoline, food and citrus crops helped boost prices.

However, the important core figure, which excludes often volatile food and energy prices, didn't surprise Wall Street. It rose 0.2 percent as expected.

The Federal Reserve reported industrial production increased 1 percent in February, well above the 0.3 percent increase analysts expected.

The consumer inflation figures came one day after a key measure of inflation at the wholesale level took Wall Street by surprise with a higher-than-expected reading. Wall Street overcame the unwelcome Producer Price Index reading Thursday to move moderately higher as it focused on further corporate takeover news.

The inflation readings draw Wall Street's attention because investors are concerned that higher prices will make it harder for the Fed to justify a reduction in short-term interest rates, even if such a move could help stave off a further slowdown in the economy. The latest inflation readings carry particular significance as the Fed begins a two-day meeting on Tuesday. The central bank has left interest rates unchanged at its last five meetings, interrupting a string of 17 straight increases that began in 2004.

Joe Balestrino, a portfolio manager at Federated Investors Inc., contends investors are viewing economic data through the eyes of the Fed and not as much for what it says about the economy.

"The fundamentals don't matter. What ultimately does matter is what the Fed is likely to do," he said.

"It's an emotional, sentiment-driven market. Anxiety is driving the market. It's hard to come to any conclusion that the fundamental value of the market is changed from three to four weeks ago."

Sentiment took a jarring nosedive on Feb. 27 when a worldwide selloff raced through the markets and sent the Dow industrials down 416 points that day. Since then Wall Street has been trying to regain its footing and ascertain whether stocks had found a new bottom.

VOLATILITY RESURFACES

As if to confirm Wall Street's contention that jitters on Wall Street had been felt at home, a measure of consumer confidence fell to a six-month low in mid-March. The Reuters/University of Michigan consumer sentiment index fell to 88.8 from 91.3 in February. Wall Street had expected a reading of about 90.

The volatility and heavy volume that has returned to Wall Street after months of unusual calm surfaced again Friday with the once-per-quarter expiration of stock index futures, stock index options, stock options and single stock futures — a confluence of expirations known on Wall Street as quadruple witching.

Stocks were also subjected to choppiness Friday as investors maneuvered their portfolios to mirror a quarterly rebalancing of Standard & Poor's indexes.

Hard-hit subprime mortgage lenders rallied Friday on word that the companies were taking steps to raise capital. Accredited Home Lenders Holding Co. jumped $1.47, or 15.6 percent, to $11.21 after the subprime mortgage lender announced plans to sell some of its loans at a discount to raise cash necessary to meet margin calls.

Fremont General Corp. rose $1.50, or 20.3 percent, to $8.90 after Credit Suisse boosted the company's credit line to $1 billion. The company said it received several proposals for additional credit.

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