Bank stocks and the broader markets fell Friday on bad economic news and reports that the Obama administration's proposal to create a "bad bank" to buy troubled assets has been put on hold.

The KBW Bank Index fell 3.88% but rose 0.9% for the week.

The Dow Jones industrial average dropped 1.82% Friday, and the Standard & Poor's 500 dropped 2.28%.

Traders said the decline began in the morning, when the Commerce Department reported that the fourth-quarter gross domestic product decreased 3.8% from the third quarter — the fastest drop in nearly three decades.

Stocks fell further in the afternoon after CNBC reported that negotiations between the government and Wall Street bankers over the "bad bank" plan had stalled, because there was no consensus on how to value bank assets.

Matthew Shields, a trader at FIG Partners LLC, said trading was fairly light Friday. "People are just going over the earnings reports from the past two weeks and waiting to see how the whole government plan will work itself out."

Flagstar Bancorp Inc. fell 13%. The $14.2 billion-asset Troy, Mich., company said Friday that it lost $200.3 million in the fourth quarter. MatlinPatterson Global Advisers LLC, the New York investment firm that had already committed to invest $250 million in Flagstar, agreed to invest another $100 million. Flagstar had said it needed the $250 million of private equity for the Treasury Department to give it $266.6 million from its Capital Purchase Program.

A team of Sanford C. Bernstein & Co. LLC analysts downgraded shares of Regions Financial Corp. and Fifth Third Bancorp on Friday to "market perform," from "outperform." The analysts cut their price targets by $4 for Regions, to $5 a share, and by $3 for Fifth Third, to $4, saying the Cleveland company may not be able to raise the capital it needs and might be forced to sell itself.

Debra DeCourcy, a Fifth Third spokeswoman, said it would not comment on analysts' speculation.

Regions fell 16.4%, and Fifth Third fell 21.6%.

Bank of America Corp. fell 3%. Coughlin Stoia Geller Rudman & Robbins LLP filed a securities class action Friday accusing the Charlotte company of failing to value mortgage-related assets properly and failing to conduct appropriate due diligence before buying Merrill Lynch & Co. Inc.

As a result, the lawsuit claims, B of A's stock traded at artificially inflated prices from July 21 through Jan. 20, when B of A posted a fourth-quarter loss of $1.8 billion, its first quarterly loss in 17 years, and slashed its dividend to a penny, from 32 cents.

B of A officials did not return phone calls.

KeyCorp fell 6.9%. The International Brotherhood of Teamsters said Thursday that it was asking its members to close their accounts with KeyCorp, the primary lender to Oak Harbor Freight in Auburn, Wash. The union has been trying to renegotiate its contract with Oak Harbor since October 2007, and members went on strike in September against the company, which they accused of violating labor laws.

Lynne Woodman, a KeyCorp spokeswoman, said in an interview Friday: "The Teamsters are trying to draw KeyCorp into this dispute between the union and Oak Harbor. But we have no dispute with either party."

Other decliners Friday included Citigroup Inc., which fell 9%; PNC Financial Services Group Inc., which fell 5%; Comerica Inc., which fell 8.1%; and Zions Bancorp., which fell 9.2%.

Gainers included JPMorgan Chase & Co., which rose 0.3%, and U.S. Bancorp, which rose 0.8%.

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