Wall Street falls in latest twist to debt squabble

BUSINESS-US-MARKETS-STOCKS:Wall Street gains as debt vote nears

By Ashley Lau

NEW YORK (Reuters) - Stocks slid back into the red on Friday after remarks from a prominent Senate Democrat gave investors another reason to back away from stocks heading into a weekend full of uncertainty over default.

Markets have become unusually headline-driven in the past few days. They had briefly regained momentum after the S&P 500 bounced off its 200-day moving average until the Senate Democratic leader said he would not accept a short-term debt limit increase, sending stocks lower.

"We've seen the markets ebb and flow based on each incoming piece of news out of Washington," said Fred Dickson, chief market strategist at D.A. Davidson & Co in Lake Oswego, Oregon. "That probably will continue up until the close."

The S&P has fallen four straight days as the stalemate in Washington on a debt-reduction deal spurred selling. The benchmark index was on track for its steepest weekly losses in more than a year.

U.S. President Barack Obama earlier told Republicans and Democrats to find a way "out of this mess." The United States will be unable to borrow money to pay its bills if Congress does not raise the debt limit by August 2.

The CBOE Market Volatility Index <.VIX>, a gauge of investor fear, jumped as much as 9 percent to its highest level since mid-March before paring its rise to 5.2 percent.

The Dow Jones industrial average <.DJI> was down 58.58 points, or 0.48 percent, at 12,181.53. The Standard & Poor's 500 Index <.SPX> was down 3.92 points, or 0.30 percent, at 1,296.75. The Nasdaq Composite Index <.IXIC> was down 2.54 points, or 0.09 percent, at 2,763.71.

Rick Bensignor, chief market strategist at Dahlman Rose in New York, said the turnaround was likely due to computer-driven buy programs designed to be triggered when the S&P hit its 200-day moving average around 1284.

"When you see a market move that fast, it's machine-driven," he said.

Weak economic data also weighed on equities. The U.S. economy stumbled badly in the first half of this year and came dangerously close to contracting in the January-March period.

Chevron Corp , the second-largest U.S. oil company, reported a 43 percent jump in quarterly profit, beating estimates, as strong oil prices and fatter refinery margins offset a drop in oil output. Still, shares fell 0.4 percent to $104.62.

(Reporting by Ashley Lau; additional reporting by Chuck Mikolajczak; editing by Kenneth Barry)

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