Stocks Fall as Republican Leader Loses Control of His Party

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It would need to be a "very" bipartisan bill, Greenhaus noted. "In any event, there's just no way, no way, it can be constructed in three days."

Gareth Berry, a foreign-exchange strategist at UBS, said the headlines look worse than they actually are. "After all, the plan was doomed to begin with, given Democrats had already decided not to put it to a vote in the Senate, and Obama had already threatened to veto it if necessary."

Berry also noted that "the nervous market reaction was justified to some degree, however, given it illustrates just how difficult it will be to reach a compromise solution before year-end."

The Republicans' "Plan B" counteroffer had included some spending cuts with tax increases only for those making more than $1 million.

At Bank of America, economists haven't changed their call expecting a deal to emerge at the last minute and much of the decisions to be delayed into the new year, with austerity of roughly 2% of gross domestic product, said Ethan Harris, co-head of global economics research at the firm.

On the U.S. data front Friday, the Bureau of Economic Analysis reported personal income growth of 0.6% in November after an increase of 0.1% in October. Personal spending rose 0.4% after falling 0.1% in October. Economists, on average, were expecting personal income growth of 0.3% and personal spending to rise by 0.3%.

The Census Bureau reported that durable goods orders rose 0.7% in November after increasing 1.1% in October, and that, excluding the transportation component, durable goods orders ticked up by 1.6% after rising 1.9% in October. Expectations were for a durable goods order rise of 0.2% and a decline of 0.2% excluding the transportation component.

"Taken together, November's personal income and spending and durable goods reports suggest that fourth-quarter GDP growth will be a little stronger than we previously thought," said Paul Ashworth, chief U.S. economist at Capital Economics.

The final University of Michigan consumer-sentiment index edged down to a five-month low of 72.9 for December from a previous 74.5 as Americans remained anxious about the outcome of the Washington debates on tax and spending reforms. It was expected to increase to 74.7 for December.

Gold for February delivery climbed $14.20 to settle at $1,660.10 an ounce at the Comex division of the New York Mercantile Exchange on safe-haven demand, while February crude oil contracts closed down $1.47 at $88.66 a barrel.

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The benchmark 10-year Treasury jumped by 10/32 to dilute the yield to 1.769%. The dollar was up 0.40%, according to the U.S. dollar index .

In corporate news, Research In Motion (RIMM) reported a fiscal third-quarter loss Thursday that was narrower than Wall Street's expectations .

The stock of the BlackBerry maker moved higher in after-hours trading Thursday but reversed course during an earnings call after RIM said it would change the way it charges customers service fees, putting a key source of revenue at risk. Shares plunged 23% on Friday.