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Wall St. sags after 2-day rally Author:Caroline Valetkevitc Date:03/25/14 Click:

NEW YORK (Reuters) - Stocks dropped on Friday as investors tempered their optimism that the economy could avoid recession, and locked in profits on banking and pharmaceutical shares after two days of sharp gains.

Bank shares, among this week's biggest gainers, declined as talk of more write-downs related to the sinking housing sector circulated through the market. The S&P financial index (.GSPF) dropped 2.5 percent.

Drug companies, which generally prosper in good times and bad, took a hit on Friday after helping lead the market higher earlier in the week.

Schering-Plough (SGP.N) and Merck & Co (MRK.N) set the pace, sinking 5.7 percent and 3.6 percent, respectively, after regulators said it would take more time to evaluate a key drug co-marketed by the companies.

Despite the day's declines, the Dow and S&P ended the week higher for the first time in five weeks. The Nasdaq was down for the fifth straight week.

"The economic backdrop hasn't changed, and there is still a high level of nervousness about any headlines that reinforce there is still reason to be concerned about the market's direction," said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles.

The Dow Jones industrial average (.DJI) slid 171.44 points, or 1.38 percent, to end at 12,207.17. The Standard & Poor's 500 Index (.SPX) dropped 21.46 points, or 1.59 percent, to 1,330.61. The Nasdaq Composite Index (.IXIC) lost 34.72 points, or 1.47 percent, to 2,326.20.

Volatility was high, as it has been all week, with the VIX (.VIX), an index of market fear, ending up 5.1 percent.

For the week, the Dow gained 0.9 percent and the S&P 500 advanced 0.4 percent, while the Nasdaq slipped 0.6 percent.

An index of retail shares (.RLX), also big gainers this week, reversed course and ended down 2.8 percent on Friday.

The rumors involving the financial sector centered around Europe's ING (ING.AS) and Fortis (FOR.BR). Traders said there was talk of possible profit warnings. ING and Fortis said they never comment on market speculation.

In the pharmaceutical sector, Merck shares fell $1.77 to $47.79, while Schering-Plough shares dropped $1.15 to $19.02.

Stocks started the day higher, boosted by strong earnings from companies including diversified manufacturer and Dow component Honeywell International Inc (HON.N), which gained 3.7 percent to $58.25.

An agreement between congressional leaders and the White House on the outlines of an economic stimulus package on Thursday and a hefty interest-rate cut by the Federal Reserve on Tuesday helped fuel a sharp two-day rebound in U.S. stocks after a global equity rout earlier in the week.

Trading was active on the New York Stock Exchange, with about 1.88 billion shares changing hands, about in line with last year's estimated daily average of roughly 1.9 billion, while on Nasdaq, about 2.63 billion shares traded, ahead of last year's daily average of 2.17 billion.

Declining stocks outnumbered advancing ones by a ratio of about 9 to 7 on the NYSE and by 15 to 13 on Nasdaq.

(Additional reporting by Kristina Cooke; Editing by Jan Paschal)

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