US equities tumbled after AIG's steep loss and capital-raising efforts suggested to investors that there may be more damage to come from the credit crisis.
Oil surged above $126 a barrel, creating another drag on equities and exacerbated by an OPEC report that oil could reach $299 barrel.
In other commodities, corn production is expected to fall 7pc this year to 12 billion bushels, the USDA said, as wet weather has slowed plantings.
The ethanol industry will consume four billion bushels, up from three billion in 2007.
At the bell, the Dow finished almost 1 per cent lower - down 121 points and the broader industrial, S&P 500 off 9.
Technologies were more resilient with the Nasdaq losing a modest 6 and 100 index off 7.
Treasuries edged up as the credit worries re-emerged and sparked demand for safe-haven bonds and notes.
The 10-year notes had to their best week in nearly two months.
Bonds gained following news late Thursday that American International Group, the world's largest insurer, posted a record $7.8 billion quarterly loss.
The dismal AIG results fanned doubts about a recovery in credit markets.
Other financial companies including Swiss bank UBS and US home-finance company Fannie Mae have recently announced asset write-downs and credit losses stemming from subprime mortgages.
Credit fears have dragged equity markets from their recent peaks, and benchmark 10-year Treasury yields from their four-month highs reached earlier this week.
Treasuries were also influenced by some reassuring comments from Citigroup's new chief executive, Vikram Pandit, after the largest US bank unveiled a plan to sell $400 billion of assets in a bid to become more efficient and profitable.
Citi has suffered hefty losses from the sub-prime mortgage debt crisis and its fallout.
It plans to wind down more than $400 billion in assets over the next two to three years.
The US trade deficit narrowed 5.7pc to $58.21 billion in March, more than expected, as imports of cars and crude oil dropped amid record-high oil prices and a weak economy. Exports fell 1.7pc.
The decline reflected another strong month of US exports and a record $6.1 bn drop in imports to $206.7 bn, which showed the US slowdown has taken a toll on consumer and business demand for foreign goods.
On the economic data scene, falling US consumer sentiment suggests the world's largest economy will grow by less than 1pc this year, according to research just released by the Reuters/University of Michigan Surveys of Consumers.
The rapid diversification of the US economy in recent years of globalisation has also made it vulnerable to micro recessions that present new challenges to policy makers, Richard Curtin, director of the Surveys of Consumers, said.
"When GDP growth is barely above zero, as it is now, the economic landscape becomes potholed by micro-economic downturns," Mr Curtin said in a research note.
On the oil front, China will ship in 20pc more diesel and jet fuel while staying a net importer of gasoline in May, as a new rule to fatten stockpiles kicks in and a tax break on fuel imports encourages inflows.
China will import 600,000 tonnes of diesel in May, from 500,000 tonnes last month and up from just 20,000 tonnes in May last year, as a rule for wholesalers to maintain inventories equivalent to at least 15 days of sales - previously 10 days - came into force on May 1.
Bankrupt US vehicle parts maker Delphi Corp said on Friday its first-quarter net loss widened under production cuts at major customer and former parent General Motors Corp.
Delphi also said it expected to continue to have adequate access to liquidity for the rest of 2008 as it works on its reorganisation plan.
The net loss widened to $589m from $533m. In the market, Microsoft is appealing the nearly $1.4 billion fine imposed on the tech giant by the European Commission for failing to comply with a landmark antitrust ruling.
Circuit City is allowing Blockbuster and shareholder Carl Icahn to review its books, a sign the struggling electronics retailer is effectively putting itself up for sale. Shares rallied.
COMEX gold continued to improve, adding $3.70 to $885 oz and about $30 on the week.
Wall St finishes weaker
The Dow Jones Industrial Average fell 120.9 to 12745.88.
Range on the Dow for the session was a high of 12,861.41 and low 12,715.02.
Dow components were 6 rises and 24 falls.
Among the few Dow improvers were J.P. Morgan chase 52c or 1.13pc to 46.57 , American Express 11c or 0.23pc to 48.96, Home Depot 62c or 0.21pc 27.98 and Microsoft 12c or 0.41pc to 29.39.
Dow falls included AIG 3.87 or 8.77pc to 40.28, Citigroup 67c or 2.76pc to 23.63, United Technologies 93c or 1.26pc to 73.13 and Exxon 1.11 or 1.23pc to 88.82.
Standard and Poor's 500 index fell 9.4 to 1388.28.
The Nasdaq Composite index eased 5.72 to 2445.52 the Nasdaq 100 index dipped 6.57 to 1960.29.
Business volume was 3.5 billion trades on the NYSE and 1.7 billion sales registered on the Nasdaq.
AIG lost most on the Dow Jones Industrial Average, plunging 3.87, or 8.77pc, to 40.28 after the insurance giant said it would raise $12.5 billion in capital after taking billions of dollars in losses on credit derivatives linked to mortgages. Shares of AIG sold off steadily all week, falling 18pc in all, as traders apparently saw the writing on the wall.
Citigroup was off 67c, or 2.76pc, to 23.63. The largest US bank by assets is seeking to sell $400 billion of holdings that aren't central to its long-term plan. The bank is rumored to be shopping around its insurance unit, Primerica, for starters.
Countrywide Financial fell 28c or 5.6pc to 4.76 as the market continued to price in a renegotiated deal, at best, for the mortgage lender.
Sprint Nextel rose 40c or 4.4pc, to 9.38. The company has also been mentioned as possibly tying up with German telephone company Deutsche Telekom's T-Mobile unit. Sprint Nextel struck a deal with network company Clearwire on a high-speed wireless Internet project.
rweabn.com.au
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