Stocks fall on housing, consumer reports

U.S. stocks had their worst week since May as disappointing new-home sales and a drop in consumer spending added to concern that the seven-month rally has outpaced prospects for an economic recovery.

Bank of America shares fell 10 percent, leading financial companies lower, as investors speculated that the largest U.S. lender will sell shares to pay back its government bailout.

Exxon Mobil and Freeport-McMoRan Copper & Gold dropped as a dollar rally dragged down commodity prices.

"The financial crisis had its roots in the property boom and bust, so any data that flies in the face of improvement is going to raise suspicion of the equity bulls," said Kevin Caron, a market strategist at Stifel Nicolaus.

The Standard & Poor's 500-stock index retreated for a second straight week, falling 4 percent, to 1036.19. The Dow Jones industrial average dropped 259.45 points, or 2.6 percent, to 9712.73. The Nasdaq composite index sank 5.1 percent, to 2045.11.

The S&P 500's rebound of as much as 62 percent since March 9 pushed its valuation to more than 20 times the reported operating income of its companies, the most expensive level since 2004.

The threat of a CIT Group bankruptcy raised concern about the sustainability of the rebound, pushing financial stocks to their steepest weekly drop since May.

Stocks fell despite news that the economy grew in the third quarter, , at a 3.5 percent pace, as government incentives spurred spending on homes and cars.

The Treasury Department will auction $29 billion of three-month bills and $30 billion of six-month bills on Monday. They yielded 0.07 percent and 0.16 percent, respectively, in when-issued trading. The Treasury will sell one-month bills the next day.

-- Bloomberg News