Wall St slides as Lloyds loss adds to bank fears

NEW YORK (Reuters) - U.S. stocks fell in volatile trading on Friday as financial shares slid after Britain's Lloyds Banking Group posted a wider-than-expected loss, adding to persistent worries about the health of the banking sector.

Shares of Bank of America fell 3.2 percent to $5.68 on the New York Stock Exchange, while JPMorgan shed 5 percent to $24.88.

The KBW Bank index fell 4.5 percent, taking its weekly decline so far to more than 13 percent.

"The significant loss reported by Lloyds has been a negative catalyst in general today," said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles. "We're seeing a little bit of a sell-off following the rally late yesterday, which caught a lot of people by surprise."

Stocks rallied late on Thursday after Reuters reported the Obama administration was working on a program to subsidize mortgage payments for troubled homeowners.

Financials fell after Lloyds Banking Group said its HBOS unit made a pretax loss of 8.5 billion pounds ($12.3 billion) for 2008, driven by 7 billion pounds in bad corporate loans, raising fears that the already partly nationalized bank will need further state help.

The Dow Jones industrial average slipped 70.09 points, or 0.88 percent, to 7,862.67. The Standard & Poor's 500 Index fell 6.95 points, or 0.83 percent, to 828.24. The Nasdaq Composite Index shed 6.36 points, or 0.41 percent, to 1,535.35.

For the week the S&P 500 was down more than 4 percent, on track to close its worst week since setting a bear market low in November.

Wells Fargo shrank 5.6 percent to $15.86, after disclosing late Thursday that its fourth-quarter loss was larger than it had initially reported.

Optimism over a $787 billion economic stimulus package set to be approved by Congress partly offset Friday's decline, but consumer stocks dropped on skepticism that consumers will rush to spend.

Wal-Mart Stores Inc shares fell 2.4 percent to $46.99, making it a top drag in the Dow. Home Depot was also down 2.8 percent.

(Additional reporting by Chuck Mikolajczak; Editing by Leslie Adler)