The Nasdaq was the best performing index, briefly climbing into positive territory although it struggled to stay there. The index was helped by Internet leader Google , which reported earnings that beat expectations after the bell on Thursday. Google was up more than 5 percent at $323.25.

But fueling worries of how 2009 will fare, bellwether General Electric was down more than 6 percent at $12.61 after the company, a Dow component, warned of an "extremely difficult" 2009 although it posted a quarterly profit that met expectations.

"GE really represents the whole market. GE is the bellwether because they operate in almost all segments of the market and there's no segment here that you can really look at and say that looks good," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

"On average companies are saying they expect a very, very challenging year and that's part of what's causing the problem," he said.

The Dow Jones industrial average <.DJI> was down 123.13 points, or 1.52 percent, at 7,999.67. The Standard & Poor's 500 Index <.SPX> fell 5.91 points, or 0.71 percent, to 821.59. The Nasdaq Composite Index <.IXIC> edged up 1.38 points, or 0.09 percent, at 1,466.87.

The earnings season so far has been a weak one, as expected, with companies announcing a slew of job cuts and giving a grim outlook for the year ahead but there have been some bright spots, particularly in the tech sector.

The S&P financial index <.GSPF> turned around to edge up 0.4 percent, while JPMorgan Chase and Citigroup were among the Dow's biggest supports. JPMorgan was up 1.7 percent at $23.50 and Citigroup gained 12.5 percent to $3.50.

The group has been hard hit recently by worries over the health of the sector and the possibility banks will have to raise more capital.

(Reporting by Leah Schnurr, Editing by Chizu Nomiyama)